Putting money in KiwiSaver is better than having it in the bank because the returns are higher, a pensioner says.
His comments come as record-low interest rates make it cheap to borrow but provide little incentive for savers.
On Monday, term deposit rates offered by the five large banks from 12 months to five years ranged from 0.50 percent to 1 percent.
At age 65, KiwiSaver members can get their money out. But some are choosing to keep their money in, waiting three-to-five days after requesting a withdrawal. Although KiwiSaver doesn’t replace the flexibility or services of a bank account or the certainty of a fixed interest rate, for those willing to take a bit of risk, it can be a way to grow savings.
A KiwiSaver member in his late 60s who wished not to be named told Newshub that after working in management most of his life, he still works part-time and is keeping his KiwiSaver going. His employer contributes 3 percent (around $25) and he contributes $60, a total of $85 each week.
After nine years, he had around $43,000 in KiwiSaver. After making two lump-sum deposits totalling $50,000 this year, he says his balance has now crept over $100,000.
"It's gone from $93,000 to $101,600...I believe in the bank, you put $50,000 in term deposits and by the time you pay tax on that money, you get nothing," the man said.
Having received personalised advice from his KiwiSaver provider, his savings are invested in a balanced fund (55 percent in growth and 45 percent in conservative). He checks his KiwiSaver balance every few days, noticing it goes up and down.
"It went down for a couple of weeks leading into the US election, now it's recovered really quick...with the swings and roundabouts, including the weekly contribution of $85, I estimate I've made $6000 to $8000 this year," he added.
Mary Holm, financial columnist and author of 'Rich Enough - A Laid-back Guide for Every Kiwi', told Newshub that now over '65's can join KiwiSaver, more are signing up. In the current low-interest rate environment, some retirees are using KiwiSaver as a bank account.
"If you're using KiwiSaver as a bank account, you should be in one of the lowest-risk defensive KiwiSaver funds," Holm said.
But it's important to know that KiwiSaver returns aren't guaranteed. Depending on what type of fund people are invested in and it's performance, returns vary.
People invested in a conversative fund should be aware that their balance could sometimes fall. For those invested in a defensive fund, there will still be tiny movements in value.
"In exchange for taking on this small volatility, there's a pretty good chance you'll receive a somewhat higher return - even after fees - than on a bank term deposit," Holm added.
"You'll certainly do better than in an ordinary bank account, which probably pays little or no return."
Almost all KiwiSaver funds are 'portfolio investment entities' (PIEs). This means KiwiSaver members pay tax on investment returns at their personal tax rate (prescribed investor rate).
KiwiSaver providers also charge fees. Retirees who don't contribute regularly or contribute small amounts could find they're better off in a low-fee KiwiSaver fund.
"I strongly suggest you use the KiwiSaver Fund Finder to find a low-fee KiwiSaver fund. Otherwise the fees could more than offset the higher returns," Holm added.
As some people cope with market ups and downs better than others and financial goals are different, Cath Lomax, chief client officer at Fisher Funds said the first thing to do is get personal advice.
"The key thing is to make sure [you're] in the right type of fund: conservative, balanced or growth," Lomax said.
"If [you] need those funds in the next couple of years then it wouldn't be right to be going into a growth strategy. Likewise if [you're] planning to be invested for 10-15 years without touching it, a conservative strategy potentially isn't correct."
Over the last 12 months, the Fisher Funds balanced fund returned around 6.5 percent. But unlike a term deposit (or savings account) returns aren't guaranteed.
"With KiwiSaver, it fluctuates so there will be ups and downs...but over time (generally 7 years or more), you're going to get a better performance," Lomax added.
Retirees considering using KiwiSaver as a bank account should check their provider's withdrawal process. As a 'statutory declaration' is required, the first withdrawal is likely to take longer.
"For clients regularly withdrawing funds, generally it's going to be three-to-five business days," Lomax said.
"As it's not as quick as a bank account, there needs to be some planning on how people are going to manage that."
Kiwibank product manager for savings, Matthew Crowder confirmed to Newshub that unlike KiwiSaver, interest paid on term deposits is fixed and won't change for the term of the investment. However, banks can't provide a watertight guarantee on customer deposits. In December 2019, Finance Minister Grant Robertson announced the Government would introduce deposit insurance of $50,000 per person per bank, but implementation is a few years' away.
Designed as a retirement savings plan, KiwiSaver's job is to provide an income above NZ Super when people reach retirement. People under the age 65 can withdraw from KiwiSaver if they're buying a first home or experiencing significant financial hardship.
For people 65 and over, keeping money in KiwiSaver is a personal choice. Some may find that having money on-call in a bank account and/or putting it in a fixed interest investment such as a term deposit may still be the best option. Or they can do both. As with any investment decision, people are urged to get advice first.
