KEY POINTS:
What happens if AMP or Westpac goes bust?" So asked a friend arguing against opening a KiwiSaver account.
But he was talking to someone who thinks joining KiwiSaver is a no-brainer thanks to the tax breaks. First there's $1000 of Government money up front to kick-start the account, $20 per week tax-free contribution, an annual fee subsidy, and from next month a 1 per cent free contribution from employers. Some savers will also qualify for mortgage subsidies on their first homes.
Why someone wouldn't join leaves me blank. Yet in the same week a mother of four of my acquaintance said she was too nervous to open KiwiSaver accounts for her children in case she chose badly and lost the money. We'd been discussing Westpac's KiwiSaver account at the time.
From where I sat there was $4000 of money for nothing dangling in front of her and she wasn't taking it. Who knows whether the $1000 sweetener will be there in a year, two years' or five years' time and, in the meantime, her children have lost the potential growth on that money.
More than 470,000 Kiwis have joined KiwiSaver, either directly or automatically via an employer. But it would seem that misapprehensions about it are widespread. A Your Views question on the subject on the Herald's website has 20 pages of responses - described by one reader as a "whingeathon".
Many displayed a high level of distrust of the Government, a lack of understanding that the money was managed by independent fund managers, and other misconceptions.
Comments included:
"The amount the Government contributes is not even worth it compared to the interest rates on mortgages." A 27-year-old, Auckland.
"What if KiwiSaver is seen as 'strategic' at some future date?" Wally, Marlborough.
Bubbles from Auckland raised questions about the IRD losing contributions.
"Future contributions appear to take several months before Inland Revenue transfer these to the provider. This is not good enough when you are dealing with a volatile financial market," another reader writes.
"1. Your money is not guaranteed. 2. It is managed by private fund managers who in return will earn millions every year no matter if there is a profit or loss." Austrian in NZ (Orewa).
Struggling (Auckland) is concerned about "the ability of any government to move the goalposts".
Michael (Wellington) complains: "Most schemes give return projections before fees are deducted."
Hammerhead (Auckland) believes come retirement time the Government will say "you have been good enough to save heaps of money, you can use that first before we pay you any National Superannuation".
"I am planning on moving overseas and all the money that I have invested will be left in that account until I'm 65. And quite possibly will stay there unless I move back." Sara H.
"The string of financial company collapses in the last couple of months should have got some alarms bells ringing. Good luck to those who are in for the ride!" Neil, Auckland.
"Once you are in the money is completely inflexible and out of your control for life, however your circumstances change. Best of luck, but my advice is don't do it." Refugee, New Plymouth.
"Government + IRD + Locked in funds = Danger." Toby, Christchurch.
"To all the suckers who signed up for KiwiSaver, I have only one thing to say: Suffer! You would have been better off putting that money towards a property." Andster, Auckland.
"I don't want my money being invested in business that I disapprove of." Bryan, Waitakere City.
"Unemployment benefits will be unavailable to anyone who has money in their KiwiSaver account." Dump Helen, Christchurch.
"I wanted an AMP KiwiSaver account but due to the long-winded process of nominating a provider I got given an AXA account which I am now stuck with." Annoyed, Nelson.
Some potential KiwiSavers I have spoken to are concerned about investing now while the markets are down. Hopefully they are worried about volatility, and don't think it is better to invest when markets are high, even if that is in reality what most people do.
Others had little understanding of the size and relative strength of the big multinational KiwiSaver providers such as ING, Westpac and AMP, comparing them with finance companies such as Numeria Finance or National Finance, which were often not much more than one-man-bands.
"It's like comparing a canoe with the Queen Mary," says Jane Anderson, general manager of public affairs at AMP.
So turning to the question of what happens if an AMP, Westpac or other KiwiSaver provider goes bust? The question isn't as academic as it sounds. Large financial institutions do at times go belly-up. Just look at Britain's Barings Bank, sold for £1 ($2.53) to ING after rogue trader Nick Leeson brought it to its knees singlehandedly in 1995.
The answer, says Anderson, is that as with all superannuation schemes KiwiSaver monies aren't held by AMP or any other provider, but by a third-party trust company. Money invested in KiwiSaver becomes a unit in a wholesale fund and held by the trustee on behalf of the investors, not AMP.
So while AMP or Westpac set up a fund and take a percentage from that fund in management fees, the money is never intermingled in their company coffers.
The fund in effect has a life of its own and in the event of a bankruptcy, merger, or even a change in direction of the provider, can continue to run under a new manager.
AMP's external trustee is the Guardian Trust. This, of course, begs the question, what happens if the trustee goes bust? Once again the fund is a separate entity and there is no mingling of funds, says Anderson.
Most of the readers commenting on the Herald website were discussing whether to open KiwiSaver accounts for themselves. But many will be parents and there is $1000 earmarked for each and every child in this country plus a $40 annual fee subsidy. Yet all it takes to open an account is to walk into a bank branch with the children's IRD numbers and sign up. Even if you choose the wrong provider, you can switch at any time.
Unless you want to make regular payments, it's best to choose a provider such as Westpac that doesn't require them. But once a child is old enough you might want to encourage a regular savings plan, especially as it can be used towards buying a first home.
It's important to check before investing for children whether there is an opening deposit required, other than the $1000 kick-start, if an annual minimum deposit is required, and if the administration fee is greater or less than the Government fee subsidy.
You might also want to check if small lump sums can be deposited at any time. It's a good lesson for children to learn to drip-feed money into investments and watch it grow.
AMP's September 2007 SuperWatch Survey found the main reasons, in order, that those surveyed hadn't joined KiwiSaver were:
1. Am saving through other means.
2. I have a private scheme.
3. I need more information.
You could always start here: www.ird.govt.nz/kiwisaver
