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Should I Sign My Children Up For KiwiSaver?

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Contributor:
Mary Holm
Mary Holm

Question:

I predict there's going to be some very angry young people in the future, when they find out they've been signed up to KiwiSaver without their consent.

Perhaps no harm is done if they can take a contributions holiday as long as they've been signed up for longer than a year. Can they take a contributions holiday for the rest of their working life? Perhaps KiwiSaver is set to become a compulsory scheme anyway, so people should grab their free government handout while it's on offer.

Whatever happened to "if it sounds too good to be true, it probably is"? There is a catch. Not all of us want any or any more of our money tied up, for a very long time, in managed funds.

There are other ways to put one's money to work that could make that "free" $1000 handout over and over again: capital gains on property, active investing, paying off the mortgage, investing directly in business. Teaching children those ways could be worth far more to them than forcing them into KiwiSaver.

Is signing your children up for KiwiSaver really a good thing?

Answer:

There might indeed be some angry young people in the future - the ones whose parents didn't bother to sign them up for KiwiSaver.

They will have missed out on the Government's $1000 kickstart - which as you say could be phased out - plus accumulating returns on it over the years. And in most cases they can get that money without ever putting in any of their own, or their parents', money.

You probably don't realise just how little commitment there is in KiwiSaver. Many providers will let children - as well as other non-employees - join with zero contributions.

And once the child starts work, generally they can take repeated contributions holidays for the rest of their lives.

The one exception to this occurs if - during their first year in KiwiSaver - the child gets a job that pays more than $2340 a year. At that level, they must pay PAYE and therefore compulsory KiwiSaver contributions. But that's only 4 per cent of pay, which they can drop to 2 per cent from this coming April. And after a year in KiwiSaver they can take their first contributions holiday.

To take a holiday, all they have to do is download and send in a simple form, and they can repeat that every five years if they wish. Unless KiwiSaver becomes compulsory, it's hard to imagine any future government removing the right to take contributions holidays, given that the government saves money by not contributing to those on holiday.

You also ignore other advantages of signing up kids for KiwiSaver. For one thing, it can get them past the "first-year barrier".

The fact that KiwiSaver employees have to contribute for 12 months before they can take a contributions holiday could discourage some young adults from joining. But if they get their first year of membership over and done with before they ever work, they can take contributions holidays whenever they wish after that, and then contribute whatever amount suits them.

Also, knowing a few young adults, I reckon many wouldn't get around to joining KiwiSaver themselves - or would opt out if they were automatically signed up. But if they are already in, and they understand how the scheme works, they're more likely to participate as adults, picking up tax credits and perhaps employer contributions as well as the chance to get a $3000-$5000 first-home subsidy.

I bet, for thousands of young people, KiwiSaver will start them on a stronger financial path than they would otherwise take.

As for your "catch" about the money being tied up, it's hardly a catch. Many of us have always acknowledged that - for many people - the tie-up is the biggest negative of KiwiSaver. That's why I advocate contributing only as much as necessary to receive all the incentives. And for under-18s, who don't get the tax credit, that means contributing nothing.

What about your objection to the money being in managed funds? It sounds as if you don't realise how wide-ranging KiwiSaver investment can be. In response to your list:

Several providers offer investment into property funds, which enjoy similar capital gains to direct property investment, take up much less time and give much better diversification.

One provider - ABN Amro Craigs - permits active investing, letting you pick the shares you go into. And many others give you great flexibility on which funds you invest in, and when you move your money - if you really want to move frequently, which I don't advise.

In almost all cases, repaying your mortgage won't be as lucrative as being in KiwiSaver. I've gone into this in depth in this column, and no doubt will again. Briefly, young, non-employee KiwiSavers who are conservative investors might be better off repaying their mortgage. But they should still at least join KiwiSaver to get the kickstart, even if they don't contribute after that. All others with mortgages are almost certainly better off in KiwiSaver, paying the minimum to get all the incentives and putting further saving into their mortgage.

Investing directly in a business isn't possible in KiwiSaver. But through share funds you can invest in a wide range of businesses. As with property, this will take much less time and give much better diversification than doing it directly.

That's not to deny that investing in your own business can be enormously profitable - if you are skilful and lucky. But few people start their own businesses under 18 anyway. And if they do, being in KiwiSaver won't affect that.

Given that no KiwiSaver contributions are necessary, if you really are going to teach your child about investment using one of the vehicles you mention - and realistically I doubt that many parents would do it without having KiwiSaver to prompt them - there's nothing to stop you doing that as well.

If KiwiSaver weren't a Government initiative, I would agree with you that it's too good to be true. But KiwiSaver is so good because taxpayers are pouring millions of dollars into it. What's more, almost all KiwiSaver funds are PIEs, which means they pay lower taxes than many other investments. In the end, though, if you don't want yourself or your children to get their share, that's fine with me. It will put that much less pressure on my tax dollars.

 

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.       

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