Mary Holm: As markets fall, should you upsize your KiwiSaver contributions?

An increase in your savings contributions while you're working can make a big difference to how much enjoyment you have in retirement. Photo / 123RF

COMMENT:

Q: A downturn in stock markets is a good time to double up investing in KiwiSaver! I am putting away 6 per cent through salary and adding 12 per cent extra through direct debit, as I have 20 years until I can access KiwiSaver.

A: Your email came in last week, when the New Zealand sharemarket and others around the world were wobbling — but it was too late for my last column. Since then, the markets have settled down, or at least they had when I wrote this. By the time you read it, who knows?

As I say so often, it's not wise to try to time markets. But if you insist, you're doing it the right way — buying more when the market falls. Too many people sell during a downturn and therefore receive low prices for their shares. Ouch!

Anyway, I hope you stick with your large KiwiSaver contributions.

There's an argument for putting the extra money in a similar non-KiwiSaver fund instead. You're already getting the maximum KiwiSaver incentives — the 3 per cent employer contribution and maximum government contribution of $521 a year. And outside KiwiSaver, you can access the money if you — or perhaps a family member in crisis — needs it.

But if that's not an issue for you, adding to KiwiSaver is great. It's simpler, the fees are probably lower, and the government scrutiny is tighter.

And some people like the inaccessibility. They're not tempted to blow the money on unnecessary stuff.

You're putting a huge 18 per cent of your pay into KiwiSaver. While you can't do that through pay deductions, these days you can contribute 3, 4, 6, 8 or 10 per cent of your pay that way.

Doubling your contributions — from, say, 3 to 6 per cent — won't double the growth in your KiwiSaver account, because the employer and government contributions won't grow.

Even so, raising your contributions can make a big difference. Here are a couple of examples, using the KiwiSaver Savings Calculator on sorted.org.nz. I assume the person is an employee who has been in KiwiSaver for five years.

• A 25-year-old in a growth fund, currently earning $50,000, will have $655,000 at 65 if they continue with 3 per cent contributions. But if they switch to 6 per cent they will have $930,000.

• A 45-year-old in a balanced fund, currently earning $80,000, will have $210,000 at 65 if they continue with 3 per cent contributions. But at 6 per cent they will have $300,000.

Those amounts are not adjusted for inflation.

If they were, the younger one's 3 per cent savings would buy what $300,000 buys today. At 6 per cent, the savings would buy what $425,000 buys today.

For the 45-year-old, it's $145,000 with 3 per cent contributions, and $205,000 with 6 per cent contributions.

The extra money from 6 per cent savings could make a big difference to how much fun you have in retirement.

Meanwhile, though, other New Zealanders are struggling to make even the minimum KiwiSaver contributions. Read on.

KiwiSaver struggle

Q: I read with interest in last week's column about a worker on the minimum wage struggling to save sufficient to contribute to KiwiSaver.

Saving a few dollars each week in a bank account is better than nothing, but I would envisage that there is a temptation to withdraw part or all from time to time to meet some expense.

I agree that if she could stretch her savings to $21 a week in KiwiSaver, she would be better off long-term. After a while, with it being deducted from her pay, it becomes less noticeable, as does PAYE, and it would not be possible to withdraw it except on hardship grounds.

As a budget adviser, I have had many clients, often working solo parents on the minimum wage, whose goal is just to survive on a daily basis. Many have rent arrears, threats of power and phone being cut off, and legal action from finance companies from which they have borrowed and are unable to keep up repayments.

Usually, some additional assistance is available through Work and Income by way of, say, accommodation supplements. However, any thoughts of saving, including KiwiSaver, are certainly not on their priority list.

Most clients get into these situations through not seeking financial advice earlier.

Unfortunately, while we can sometimes work with creditors to lessen repayments, this is usually a long and costly haul. Often an insolvency option is the best solution to give them a fresh start financially.

Anyone on the minimum wage has to be very frugal just to have a reasonable lifestyle.
Putting money aside into KiwiSaver is not a preferred option by many, particularly if they are young and the benefits are decades away.

A: You put up a great argument for the KiwiSaver change I would most like to see: an option to contribute 1 per cent of your pay or benefit. Those on the minimum wage working a 40-hour week would contribute $7.08 a week, and for most beneficiaries it would be less than that.

And if the 1 per cent option was introduced at the same time as benefits and the minimum wage are increased, people's take-home pay wouldn't go down.

Of course, 1 per cent contributions wouldn't grow to a huge retirement fund. But people's circumstances change, and many would be able to increase their contributions later.

Some people say low-income workers and beneficiaries don't need to save for retirement. They're used to living on little, and their income usually goes up when they go on NZ Super.

But I bet a lot of them would really like to know they are building up a fund for their future.

Benefit rules too tough?

Q: I was horrified to read in last week's column that the Ministry of Social Development may judge that significant lump sums deposited into KiwiSaver may be considered deprivation of income (DOI) by beneficiaries.

The MSD's response to the KiwiSaver lump-sum question is oppressive and not in line with the "from our first day in government, we have put the wellbeing of New Zealanders at the heart of everything we do" statement from the Government. This MSD approach does not contribute to people's wellbeing.

The MSD policy/guidelines re DOI are inconsistent and unfair. I could buy art and expensive jewellery and stash it away. The MSD currently would not consider that I had thereby deprived myself of income if I later want to apply for rest-home payment assistance.

In contrast, in this person's case the MSD can diminish and restrict the person's opportunities as a penalty for not being wealthy enough. This is deprivation of a person's liberty and freedom of choice.

We already have enough poverty and social alienation here. We need policies that are inclusive and supportive. We need a better MSD. Bugger them.

A: Steady on!

A question for you: would it be okay if a beneficiary who inherited $1 million put it all in KiwiSaver — so they could have an upmarket retirement — and then continued to receive a benefit?

While it's good to debate where the line should be drawn, most people would say it has to be drawn somewhere.

And you're only sort of correct about art and jewellery.

"Personal belongings such as jewellery, artworks, collectables or family taonga are considered exempt assets under the Residential Care and Disability Support Services Regulations," said Matt McLay, group general manager client experience and service design at MSD.

However, he added: "Artworks or jewellery bought as investments are not exempt.

"During the residential care subsidy application process, people are asked a lot of detailed questions about their assets and income to help clarify this point. To be declared as an investment, assets have to be 'capable of being realised', which is generally understood to mean easily sold and converted into cash."

What about when someone applies for a benefit?

"Generally, personal belongings such as art and jewellery are not considered assets when applying for a benefit. However, such items purchased as investments and that can easily be sold for cash can be considered assets," said McLay.

Okay, I said, can you please explain the broad principles behind this policy?

His reply: "MSD is responsible for assessing people's ability to contribute to the cost of their residential care on behalf of the Ministry of Health, which pays the subsidy.

"The broad principles underlying the financial means assessment for residential care are set out in section 3 of the Residential Care and Disability Support Services Act 2018. In particular, section 3(f) states financial support is made available to people, taking into account that where appropriate, they should use the resources available to them before seeking support from the state."

My final question: would he comment on what the reader says in general — such as that the guidelines on DOI are inconsistent and unfair, and that the person is being deprived of freedom of choice?

McLay's reply: "Deprivation of income is assessed with discretion on a case-by-case basis. This is to ensure the full circumstances of each case can be considered and therefore provide a fairer assessment.

"MSD is here to support people who are financially unable to support themselves and exists to highlight the responsibility of people to look to their own resources before seeking support from MSD."

Overseas pensions

Q: I started working in 1972 in England, and for the next dozen years my employers paid my UK National Insurance. A dozen years later I went to work overseas and my mum advised me, "Pay your NI every year and you will get a full UK pension."

I did so, paying a few hundred pounds every year even after arriving in NZ in 2003.

Approaching my 65th birthday, I contacted Winz, which told me I would get NZ Superannuation but the UK pension would be deducted.

I was pleased that only 11 years work in NZ had given me the right to full NZ Superannuation and that it was more than the UK pension. For the next two years I happily received NZ Superannuation knowing that the UK was paying about 90 per cent of it.

Then I read a letter and your reply in the Saturday Herald. It pointed out that in New Zealand all compulsory foreign-government-run pensions are deducted. But employment-related pensions are not deducted. For example, I have a friend who gets an American teacher's pension on top of her full NZ superannuation.

But the specific point you made was that the fraction of my UK pension that came from optional contributions made while working overseas should not be deducted from my NZ Superannuation.

I contacted MSD and it was very helpful. It took me some time to produce the proof from the UK, but ever since, I've got a full UK pension and also roughly 60 per cent of NZ Super. It leaves me several thousand dollars a year better off.

Incidentally, and much to my surprise, MSD calculated and back-repaid for the two years that I was unaware of this feature — a very pleasant lump sum of about $10,000.

I'm writing to let you warn other retired immigrants who may be missing out and also to publicly thank my mum, the MSD staff and you.

A: It's great to know this column was helpful — and good you acknowledged MSD, after the last letter!

For other readers: There's more information about the foreign pension rules at tinyurl.com/PensionRulesNZ. But please don't write to me saying the rules are unfair. We've been through that before in this column.

- Mary Holm is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or click here. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.