Lack of financial advice disadvantaging
many with KiwiSaver
Along with other commentators, I have previously lamented the fact that the majority of the $57 billion1 held in KiwiSaver funds has been invested without financial advice. This lack of advice means that there has been little or no thought applied to the mix of investments (asset allocation), the individual’s risk profile, their investment purpose (e.g. retirement or first home purchase), and their investment timeframe.
One of the risks that this lack of advice creates was revealed in March when we experienced a 30% contraction in global share markets. At that time there were people who couldn’t settle their first home purchases because their balances had shrunk. And others that, in a panicked response, switched out of their higher growth asset allocation just in time to avoid the strong market rebound that occurred in April. They ‘locked in” what proved to be temporary losses in share markets and exchanged this for a more stable but low growth future in cash and fixed interest. It will take these KiwiSaver members years to recoup the losses that were largely recovered in the following month. Hopefully, these costly experiences were educational, and the same mistakes will not be made next time, at least by these people.
However, there is a second and more insidious risk that this lack of advice has created.
These individuals may now no longer trust in investing for their futures and, as a result, they become unnecessarily conservative and/or they reduce their contributions to their accounts. In my view, this is probably more dangerous as many people will only discover the reality of the situation when it is too late.
This year the Government has started requiring all KiwiSaver providers to include, in the Annual Member Statement, information on what the estimated future value of a member’s KiwiSaver account might be at retirement. These Statements, which all KiwiSaver members should have just received, contain an estimate of what their account balance might be at age 65 and what level of future weekly drawings that balance might be able to fund. The assumptions behind these calculations are prescribed by regulations, so that there is consistency between providers. For the first time, members will be able to see what level of retirement income they may be on track to receive.
Under the current rules, members can receive KiwiSaver withdrawals from age 65 in addition to NZ Super. The level of NZ Super depends on your tax rate and personal circumstances but for most people it is currently between $326 and $424 per week.
If we assume that NZ Super continues to be largely free of any income or asset testing, then the NZ Super and the KiwiSaver weekly figures can be added together. When compared with their current after-tax income I suspect that for many the result might be sobering.
But what can you do about it? I am mindful that, at a time when unemployment is increasing due to the impacts of COVID-19, talking about increased savings may seem a little distasteful. However, if you are fortunate enough to not have had your income reduced, then I encourage you to look carefully at your figures and ask yourself, “to what degree am I prepared to reduce my standard of living in retirement?”
As a rule of thumb, if you are able to receive 70% of your after tax pre-retirement income during you retirement years, then you are likely to be able to enjoy a similar lifestyle. If your projected future income is below this, then you may need to take action.
Reviewing the asset allocation of your KiwiSaver may be part of the solution but for most of us the reality is that we need to be saving more. Increasing your savings via KiwiSaver is one option but the locked-in nature of KiwiSaver limits flexibility. As an alternative I often find, myself recommending a diversified PIE investment which is established in parallel with ones KiwiSaver account. These investments look a bit like KiwiSaver, in terms of the type of investments they hold and their ability to receive regular contributions, but with the key difference that they are accessible at relatively short notice. As well as forming part of our long-term savings such an account can also act as a “rainy day” emergency fund.
Over the last two months New Zealand has benefited from being in a position of having financial reserves to call on. I encourage my clients, whether they be individual or families, to apply the same principle to their finances.
One of the risks that this lack of advice creates was revealed in March when we experienced a 30% contraction in global share markets. At that time there were people who couldn’t settle their first home purchases because their balances had shrunk. And others that, in a panicked response, switched out of their higher growth asset allocation just in time to avoid the strong market rebound that occurred in April. They ‘locked in” what proved to be temporary losses in share markets and exchanged this for a more stable but low growth future in cash and fixed interest. It will take these KiwiSaver members years to recoup the losses that were largely recovered in the following month. Hopefully, these costly experiences were educational, and the same mistakes will not be made next time, at least by these people.
However, there is a second and more insidious risk that this lack of advice has created.
These individuals may now no longer trust in investing for their futures and, as a result, they become unnecessarily conservative and/or they reduce their contributions to their accounts. In my view, this is probably more dangerous as many people will only discover the reality of the situation when it is too late.
This year the Government has started requiring all KiwiSaver providers to include, in the Annual Member Statement, information on what the estimated future value of a member’s KiwiSaver account might be at retirement. These Statements, which all KiwiSaver members should have just received, contain an estimate of what their account balance might be at age 65 and what level of future weekly drawings that balance might be able to fund. The assumptions behind these calculations are prescribed by regulations, so that there is consistency between providers. For the first time, members will be able to see what level of retirement income they may be on track to receive.
Under the current rules, members can receive KiwiSaver withdrawals from age 65 in addition to NZ Super. The level of NZ Super depends on your tax rate and personal circumstances but for most people it is currently between $326 and $424 per week.
If we assume that NZ Super continues to be largely free of any income or asset testing, then the NZ Super and the KiwiSaver weekly figures can be added together. When compared with their current after-tax income I suspect that for many the result might be sobering.
But what can you do about it? I am mindful that, at a time when unemployment is increasing due to the impacts of COVID-19, talking about increased savings may seem a little distasteful. However, if you are fortunate enough to not have had your income reduced, then I encourage you to look carefully at your figures and ask yourself, “to what degree am I prepared to reduce my standard of living in retirement?”
As a rule of thumb, if you are able to receive 70% of your after tax pre-retirement income during you retirement years, then you are likely to be able to enjoy a similar lifestyle. If your projected future income is below this, then you may need to take action.
Reviewing the asset allocation of your KiwiSaver may be part of the solution but for most of us the reality is that we need to be saving more. Increasing your savings via KiwiSaver is one option but the locked-in nature of KiwiSaver limits flexibility. As an alternative I often find, myself recommending a diversified PIE investment which is established in parallel with ones KiwiSaver account. These investments look a bit like KiwiSaver, in terms of the type of investments they hold and their ability to receive regular contributions, but with the key difference that they are accessible at relatively short notice. As well as forming part of our long-term savings such an account can also act as a “rainy day” emergency fund.
Over the last two months New Zealand has benefited from being in a position of having financial reserves to call on. I encourage my clients, whether they be individual or families, to apply the same principle to their finances.
1. FMA KiwiSaver Annual Report 2019, Financial Markets Authority, October 2019.
***
Peter Ashworth is a Principal of New Zealand Funds Management Limited, and a Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
***
First published in the Otago Daily Times on 8 June 2020, as ‘Lack of financial advice disadvantaging many with KiwiSaver members.’
