We're not quick enough on the uptake with KiwiSaver

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Even if the Government clips its wings in the Budget, KiwiSaver will still fly says Mary Holm

People often marvel at New Zealanders' swift uptake of KiwiSaver, with its 1.7 million members so far. But I marvel at the fact that more than 2 million others under 65 have not yet joined. The scheme - and particularly the first year in it - is an unusually good deal.

Whether KiwiSaver will remain so attractive after the Government's 2011 Budget, only the insiders know. Some observers argue that it would be a great pity to mess with success - especially given that the Government is trying to encourage New Zealanders to save.

Others, pointing out how short of money the country is, say that even with its wings clipped, KiwiSaver will still fly - or perhaps we should say will still stride confidently through the undergrowth.

Certainly there seems to be a bit of wriggle room in the one-off $1000 kick-start or the tax credit, which matches members' contributions up to $1043 a year. Those current government incentives are generous.

For self-employed and non-employed adults who contribute $20 a week or $1043 a year, the incentives almost triple their contributions in the first year.

Three times as much going in amounts to three times as much in savings at the other end. And that's before we count returns on the KiwiSaver fund, minus fees and tax, which will almost always grow the account further.

As our tables show, employees get an even better deal, with their savings also boosted by employer contributions.

Those on low incomes do especially well, because the kick-start is the same for everyone, and the tax credit is capped. Someone earning $10,000 and contributing 2 per cent of their pay, or $200 a year, ends up with a total of $1600 going into their account in their first year - plus net returns. That's eight times their own input.

That multiplication of people's contributions must be unbeatable in any investment with comparable risk.

Sure, there are extraordinary boom years in property or shares.

But you can invest in KiwiSaver funds that hold purely property or shares, and participate in those same booms, while benefitting from the multiplication.

After the first year, without the kick-start, KiwiSaver is not quite so generous. So if you want just the cherry on the cake, you can take part in the scheme for just a year and then take repeated contributions holidays until retirement or, if you are not employed, just stop contributing.

But the cake itself - KiwiSaver after your first year - is still pretty yummy.

Non-employees' contributions up to $1043 are doubled by the tax credit. And employees' contributions are doubled by their employers, and boosted further by the tax credit.

We shouldn't get carried away though.

When comparing KiwiSaver with other investments we have to also consider what happens over the years.

Let's look at the money you contribute in the KiwiSaver year that ends on June 30. Depending on your situation, your contribution will be anything from doubled to multiplied eight or more times.

That's great. But from next year on, your 2011 money will sit in your KiwiSaver account, earning whatever your fund earns after fees and taxes. Usually, that will be a fairly ordinary managed fund return, ranging most of the time between minus 10 and plus 20 per cent a year.

It's quite possible you could have gone with a non-KiwiSaver investment of similar risk that would have earned a higher annual return.

To beat KiwiSaver, the difference in returns would have to be large enough to more than make up for the KiwiSaver first-year multiplier over time, and that's not easy. But it might happen over 30 or 40 years.

Clearly, people of say 45 or more don't have that long in KiwiSaver - at least until they can access their savings. The money that goes into their KiwiSaver accounts each year won't have all that many years of ordinary returns to water down the fantastic first year.

For younger KiwiSavers, however, it's possible that alternative investments - including rental property investments that the Government is trying to discourage - could beat KiwiSaver over the long haul.

And if the Government reduces the KiwiSaver incentives, that likelihood increases.

Footnote: Repaying a mortgage or other debt improves your wealth as much as in investment that earns the same as the interest rate on the debt. That means that repaying high-interest debt - such as credit card debt, is a great move.

It's likely to be better than investing in KiwiSaver.

The same can't usually be said for repaying a mortgage, with its lower interest rate. But if the Government reduces KiwiSaver incentives, even mortgage repayment might beat contributing to KiwiSaver for younger people.