There is a lot of focus in the media and investment industry on the “front-end” (or accumulation period) of KiwiSaver in terms of:
– Getting people to sign up for Kiwisaver
– How much they contribute
– Which type of fund to invest into etc etc
But there has been very little focus on the “back-end” of KiwiSaver in terms of what investors do once they reach 65. And yet the decision on what you do with your funds once you have access to them is just as important as the “front-end” issues.
KiwiSaver is structured so that you can get a lump sum when you reach 65. For some people this will be the largest lump sum of money they will have ever received. There is a real risk that some will take the lump sum and spend it on a car or a trip or something else rather than use as it the basis of some retirement savings.
Workplace Savings NZ found that most of the over 20,000 people who took out their KiwiSaver (as they have reached 65) did so as a lump sum.
An obvious answer to this issue is to have products that provide the ability for investors to draw on their savings over time in an efficient method. Overseas, annuities are one way of dealing with the “decumulation” of investment savings where investors get a regular stream of income after providing a life company with a lump sum.
However, annuities are not popular here at all as:
– They have a tax disadvantage to them
– The annuity usually will cease when the investor dies and any residual balance is not paid to the estate
– Historically their returns have been low
For solutions to be found to the decumulation issue it will take some supportive Government policy plus the industry needs to provide more attractive products.
With no change the Government risks seeing some KiwiSaver investors potentially waste their “pot of retirement gold” and then once again become totally reliant on the State for their retirement – which is not a good place for be for the retiree or the Government.