Kiwisaver threat Insuring your nest-egg,
Millions of dollars of retirement nest-eggs are being lost to personal financial crises, Rob Stock writes.
KiwiSaver has overtaken cars as most people’s second most valuable asset with average balances now topping $15,000.
Strip out the 42 per cent of KiwiSavers who aren’t regularly saving, and the average balance for long-saving wage-earners would be much higher.
Yet the 2017 KiwiSaver report from the Financial Markets Authority shows nest-eggs being lost because people aren’t insuring their KiwiSaver like they insure their cars.
In the 12 months to the end of March, $81 million was paid out of KiwiSaver in cases of financial hardship, with 13,790 people drawing out an average of $5786 to help pay the bills.
Another $32m was withdrawn and paid to KiwiSavers suffering from serious illness, and $43m was paid out when the saver died, with the money going to their estate.
Each withdrawal tells the tale of a life fallen into financial difficulty, and of KiwiSaver acting as a kind of insurance, but in the cases of financial hardship, and many of the cases of illnesses, they are also tales of retirement savings stripped bare.
KIWISAVER V CARS
Financial adviser Robbie Crawford from Lifetime in Timaru believes many people haven’t cottoned on to insuring their nest-eggs like they insure their cars.
The average age of the car fleet is 14 years, with only a quarter aged eight years or less.
A rough estimate for the average price of cars in the country is a little over $8000, and the median around $5000, far short of the average KiwiSaver balance.
‘‘We manage a lot of KiwiSavers, and we see the balances are getting quite considerable. In many cases, it’s people’s second biggest asset,’’ he says.
But while a car is easy to insure, depending on your age and driving history, protecting your amassed super nest-egg is harder.
‘‘People ask how much insurance should I have, but there is no right answer,’’ he says.
Everyone’s circumstances, including their current mortgage and the number of people who depend on them, are different.
But there are things people can do to reduce their outgoings that would make it easier to get by, should illness, accident or a job loss see their earnings fall.
These include avoiding unnecessary personal debt, reducing the mortgage as fast as possible, and keeping personal spending low.
COVERING UP
KiwiSavers can also protect their nest-eggs with insurance, though every dollar spent on insurance is a dollar that can’t be paid off the mortgage, or invested in a scheme like KiwiSaver.
The typical mix of insurances that advisers like Crawford use are life, trauma, and temporary disability cover, as well as health insurance and income protection.
Of those, only income protection provides an ongoing income stream that can be used to continue KiwiSaver contributions until the policyholder is able to return to work.
Life insurance can be the difference between a surviving spouse being able to leave their KiwiSaver untouched and carry on saving.
There are 2.7 million KiwiSavers, meaning the vast majority of families have accounts in schemes.
But AMP’s Ben Mabon says: ‘‘Research shows that at least 1000 families a week are extremely vulnerable to adverse events relating to death, disability or illness because they are underinsured.’’
That’s a lot of KiwiSaver accounts at risk, but KiwiSaver broke the traditional link between workplace pensions and insurance.
KIWISAVER INSURANCE
KiwiSaver was designed to get all workers saving for their retirements, but it ended up displacing a great many group and company pensions schemes that often offered members insurance as part of their package of benefits.
AMP attempted to re-establish that link last year, and is about to have another go.
Last year AMP experimented by offering a package of life, income protection and trauma insurance to its 240,000 Kiwisavers for a limited time last year.
It called it Essentials, and the base cost was $11 a month for people aged 18 to 30 which offered $100,000 of life cover, and $10,000 of trauma cover, paid out if the policyholder was diagnosed with one of a number of specific ailments like a serious heart attack.
It also offered $2000 a month temporary disablement cover.
Essentials was a one-size fits all package designed to give people a base level of cover so they wouldn’t have to raid their KiwiSaver nest-eggs should they suffer a health crisis.
‘‘We were trying to address the fact many people don’t have any cover in place,’’ Mabon says.
‘‘It was a bit of a test and learn for us. It was a unique package.
‘‘It was low-cost – probably the most affordable life insurance offer in the market – and it was a direct product, simply purchased online.’’.
Customers needed to answer only two medical questions: ‘‘Have you received medical advice that you have an illness that could result in your death within 12 months of making this application?’’, and ‘‘Have you received in the last 12 months treatment from a medical specialist?’’
While Essentials was discontinued, AMP is close to unveiling Essentials 2.0.
‘‘We’ve been figuring out how to make it available to more customers,’’ Mabon says.
HOME CHOICES
Housing choices could end up having a big impact on the proportion of a person’s KiwiSaver balance that is available for retirement spending.
AMP’s Blair Vernon suspects many people are over-borrowing to buy homes.
‘‘The data does not suggest people only take out the absolute minimum.
‘‘The first question they ask on the phone is ‘What’s the maximum I can take out’?’’
But, he says: ‘‘When we looked, we found the people doing a withdrawal for first home deposits, we see a large proportion of them restarting contributions after.’’
Taking on large mortgages can be a risky proposition. It exposes borrowrs to higher risk of mortgage default, but can also mean they have little chance to save and invest in other assets.
It’s not known what proportion of hardship withdrawals from KiwiSaver are by people with mortgages.
Two years ago BNZ forecast that based on current payment trajectories, a third of people with mortgages wouldn’t have paid them off by age 65.
They could be trapped into using their KiwiSaver nest eggs to pay off their loans, leaving them with little to supplement NZ Super, unless they downsize or move somewhere cheaper.