There were many potential changes to KiwiSaver depending on the outcome of Saturday’s election, some more radical than others. Governments cannot seem to help themselves by tinkering with retirement savings and this can be very unsettling for those contributing their hard earned income to their retirement nest egg.
Just prior to the election National outlined its proposed changes to KiwiSaver. The good news was there would be no tinkering with the $1,000 kick-start payment when joining KiwiSaver, the contribution rates, or the member tax credit (they already halved that from $1,042 to $521 in the 2011 Budget).
The National win is potentially good news for KiwiSaver members trying to get on the property ladder, but is it in the best interests of retirement savings overall?
Part of National’s pre-election announcement was they intend to provide $218 million of government support over the next five years to first home buyers in KiwiSaver via the HomeStart Package.
The HomeStart Package, intended to take effect from 1 April 2015, would see grants for those KiwiSaver members who qualify and are building or purchasing a newly built home double versus the benefits available to purchasers of existing homes. Subject to certain qualification criteria, a KiwiSaver member who has contributed for 3 years would be able to receive a grant of $6,000 for an individual ($12,000 for a couple); $8,000 after 4 years ($16,000 for a couple); or $10,000 after 5 years ($20,000 for a couple). This is a significant leg-up for those looking to purchase a newly built first home.
Another change proposed by National will be allowing KiwiSaver members purchasing their first home (existing or new) to access the $521 p.a. of member tax credits contributed to their accounts by the government (provided they have contributed at least $1,042 p.a.). This is in addition to the current policy of being able to access all of the member’s own contributions and their employer’s contributions. Leaving only the $1,000 kick-start payment in their account.
Whilst these changes would provide some welcome additional funds for first home purchasers, is it in the spirit of what KiwiSaver was actually intended for?
KiwiSaver was introduced in 2007 to encourage Kiwis to start provisioning for their own retirement. Kiwis have not been good savers and are generally under prepared when it comes to having a well diversified retirement nest-egg.
With the prospect of many KiwiSaver members being able to draw down virtually all of their savings to purchase property, we will end up with more money continuing to flow into the property market, which in some centres could add to price pressures.
But there are two more worrying outcomes. Firstly, KiwiSavers who have depleted their accounts to the minimum will be missing out on the benefits of compounding returns over time, and it may take some people many years to rebuild their accounts. This could be a significant cost in the long run. Secondly, we will fail to address the issue of under-funded retirees having a more diversified and readily accessible pool of funds in retirement, which will ultimately mean continued reliance on government funded superannuation benefits.
That is not the intention of KiwiSaver.
Head of Wholesale & KiwiSaver