Perhaps surprisingly, many people who invest in KiwiSaver don’t know what they’re investing in. And the thing is, to achieve your savings goals, it’s really important that you choose the right fund.
KiwiSaver is a voluntary scheme that was set up in 2007 to help Kiwis save for retirement. As an employee, you can contribute 3%, 4%, 6%, 8% or 10% of your gross salary (before tax) and can also make lump-sum payments. Your employer is also required to contribute at least 3% of your salary.
If you are self-employed, you can also contribute to KiwiSaver and make payments of any amount to a provider of your choice.
As an incentive to save, the Government will add an extra 50 cents for every dollar you contribute to KiwiSaver up to a maximum payment of $521.43. So, to receive the full payment, you need to contribute a minimum of $1,042.86 a year.
Types of KiwiSaver funds
When you contribute to KiwiSaver, you’re investing in a managed fund. You pool your contributions with other investors and receive units in return.
Here are five fund categories that many KiwiSaver providers offer:
- Cash (low risk)
- Conservative (low – medium risk)
- Balanced (medium risk)
- Growth (medium – high risk)
- Aggressive (high risk).
Risk & return
The funds listed above vary in risk because of the types of assets they invest in. A fund’s risk level is determined by the percentage of growth assets (such as shares and property) it invests in. Lower-risk funds, such as Cash and Conservative, invest mainly in income assets (such as term deposits and bonds) and have less exposure to equities.
Here is an estimate of the percentage of growth assets in the five types of funds:
- Cash (0 – 9%)
- Conservative (10 – 34%)
- Balanced (35 – 62%)
- Growth (63 – 89%)
- Aggressive (90 –100%)
Why take risk?
The reason why you may opt for a riskier fund, with largely growth assets, is because over time it has the potential for higher returns. To learn more about investment risk, read this post.
How do you intend to use KiwiSaver?
When deciding on a KiwiSaver fund that best suits your needs, ask yourself the following questions:
- What is the purpose of my KiwiSaver?
- How soon will I need the money?
KiwiSaver is primarily a retirement savings scheme. Savings are generally locked in until the qualification age for New Zealand Superannuation, which is currently 65. You may be able to apply to withdraw your funds earlier in limited circumstance, such as purchasing your first home.
Choosing a fund: Two scenarios
- Bob and Angela are both in their early 40s. They have already purchased a home so they intend to use their KiwiSaver contributions for their retirement.
- Tony and Kate, on the other hand, are in their mid-20s and saving for their first home. They are planning to purchase a home using their KiwiSaver contributions in the next couple of years
Each couple has a different goal and timeframe.
Bob and Angela have plenty of time before retirement. They have 20-plus years which may influence the fund they choose. Their longer time frame means they can consider opting for a higher-risk fund. Bob and Angela understand that growth assets can fluctuate in value but they also know that if their fund dips in value, they have plenty of time to recover. For this reason, they may be comfortable with higher risk for the chance of a higher return.
How about Tony and Kate? They too, know that growth funds generally yield higher returns over time. However, they are planning to use their investment for a deposit on their first home in a couple of years. They need to have more certainty around the value of their investment when they plan to use it towards their house purchase and would be more sensitive to fluctuations in value. So, in this case Tony and Kate may be more comfortable choosing a less risky fund and accept potentially lower investment returns. After having purchased their first home, they may well then decide to invest their KiwiSaver savings in a fund with potentially higher returns.
Regardless of your circumstances, risk tolerance is a personal thing. Many factors come into play, like timeframe, your age, your upbringing, number of dependents and the gap between your income and expenses.
GoalsGetter can help you choose the right KiwiSaver fund.
There is no such thing as a ‘free lunch’ in this world, and all KiwiSaver providers charge fees. Generally, the more actively managed a fund is, the higher the fees are likely to be. It pays not to base your decision on fees alone; you should choose the fund that best suits your needs. Selecting the right type of fund should be your first priority. Then you can use tools like Sorted Smart Investor to compare fees for those fund types.
Why not invest in a non-KiwiSaver fund?
Currently, KiwiSaver isn’t compulsory, although you will be enrolled automatically if you start a new job and you’re not already a member. Whether or not you’re in KiwiSaver, there is nothing stopping you from also investing for your retirement in managed funds.
The main benefit of non-KiwiSaver investment options is that you can withdraw your investment at any time (i.e. you don’t have to wait until age 65). The main benefit of KiwiSaver is that you receive the additional contributions from your employer and the Government. You may therefore choose to use a KiwiSaver scheme to the degree necessary to get the available benefits, but then use a standard managed fund for any additional retirement savings. For example, if you’re self-employed (and so effectively don’t benefit from the employer contribution), you may still decide to make a small contribution to receive the Government credits but then use a non-KiwiSaver fund for the rest of your retirement savings. Alternatively, you may like the fact that your KiwiSaver savings are locked away until retirement and that you won’t be tempted to use the money for something else.
Nikko Asset Management New Zealand Limited (Company No. 606057, FSP22562) is the licensed Investment Manager of Nikko AM NZ Investment Scheme, Nikko AM NZ Wholesale Investment Scheme and the Nikko AM KiwiSaver Scheme. This material has been prepared without taking into account a potential investor’s objectives, financial situation or needs and is not intended to constitute personal financial advice, and must not be relied on as such. The Product Disclosure Statements are available on our website: https://www.nikkoam.co.nz./invest/retail.