You could be sitting in a default Kiwisaver fund and you may want to change.
A recent article on the FMA website states that Kiwis take longer to choose a movie than check their KiwiSaver fund. It may not be high on your priority list but taking the time to ensure your hard-earned cash is sitting in the right fund for you is pretty important to ensure you’re preparing right for your future.
Default funds and why they’re not always the best option.
If you don’t choose a provider and a fund for your KiwiSaver, your nest egg will end up in a default fund chosen by the government. Your contributions will be automatically invested into a conservative investment fund – this is the least risky type of fund, but also means a potentially much lower return. Over 430,000 KiwiSaver members continue to be invested in default KiwiSaver funds and have missed out on an estimated $1 billion and growing in the last 6 years. If you think in terms of the end-game, this could come at an enormous cost by the time you hit retirement age.
And let’s not forget the issue with PIR tax…
Currently, an investors tax rate, or PIR (Prescribed Investor Rate) can be 10.5%, 17.5% or 28%. All default funds are automatically taxed at the highest PIR (28%). For many of us this rate could be incorrect and we are paying more tax than we should. What’s worse is that there’s no way to get the over-paid tax refunded back to us. So once it’s paid, it’s gone for good.
So what are the stakes?
From the start of your working career until the age of retirement this could mean missing out on hundreds of thousands of dollars from investment earnings.
For example, a 30 year old earning a $50k salary with a contribution rate of 3% who has no intention of withdrawing their balance until retirement still has 35 years left in KiwiSaver. By the time they reach retirement age they will receive $260k if they’re invested in a conservative fund or $567k if their money is in a growth fund.
That’s 74% more in your pocket for retirement without any extra effort.
And to really maximise growth in your Kiwisaver fund, make sure you’re contributing enough to receive your full Member Tax Credits.
How do you know you’re in a default fund?
The following providers have been selected as KiwiSaver default providers for the 7 year term starting 1 July 2014:
- Fisher Funds
- Booster (formerly Grosvenor)
This means that unless you chose a fund provider when you enrolled in Kiwisaver, you’ll have been randomly assigned to one of these providers and placed in that providers default Kiwisaver fund. While being in a default fund isn’t a bad thing, it just means your money could most likely have a higher earning potential if it was invested more consciously.
The benefits of choosing your own provider
Transitioning to a provider and fund that best meets your investment goals and matches your tolerance for risk – and can also give you the option to invest in line with your social and personal values. For instance, KiwiSaver provider Booster offers ‘Socially Responsible’ funds which excludes investing in companies or industries that could have wider negative effects on the environment or society. They typically exclude investments in things like tobacco production, gambling operations, fossil fuels, nuclear arms, and ensure your funds are ethically invested.
Which fund is best for me?
Your age, risk profile, whether you’re wanting to withdraw to purchase your first home and more, are all contributing factors in deciding which fund is right for you.
We can help you get your money working smarter. Ready to talk? Meet us for a free chat and the coffee will be on us.