Inertia works both ways in KiwiSaver
Q. My son aged 27 is a self-employed builder. He has returned from extensive overseas travel and is now ready to settle. Rather than rent again is looking to buy his first home. He and his partner currently have pre-approval to buy a property. They have a 25 – 30% deposit and will borrow the rest. His partner is in KiwiSaver and they both work full time. Should my son join KiwiSaver as well, or focus on repaying his mortgage?
A. Your son and his partner have done well to save such a large deposit for their first home. Should your son join KiwiSaver – or pay or his mortgage quicker? As long as the Government continues to contribute to KiwiSaver by way of Member Tax Credits, the effective return will be better than the interest rate on his mortgage.
As your son is self employed he has to make the first move. Inertia is a strong driving force in KiwiSaver – working both ways. It has worked in favour of many employees who have been auto enrolled, haven’t missed the money, and so have continued with it. Many are still with the conservative default Scheme that they were randomly assigned at sign up, and inertia keeps them there whether it’s suitable for them or not.
“I should join KiwiSaver but I just haven’t got round to it” is a comment I hear all too often from self employed people. The delay is costing them. In fact, if they have been procrastinating since July 2007 it will have cost them up to $4692 in Member Tax Credits (MTC) that they could have earned but haven’t.
Although the Government has cut MTC in half it still makes good sense for most eligible people under the age of 65 to join. The ‘kick start’ of $1000 is still paid to every new member. Most self employed people can afford to contribute $1042 a year (or $87 a month), which will entitle them to MTC of 50c in every dollar, up to a maximum of $521 per year.
A self employed person can join KiwiSaver directly through any of the Scheme providers. If they want personalised advice, they should talk to an Authorised Financial Adviser (AFA). How much will that cost? Ask first, but it may be free. Some advisers may receive a small commission, however all commissions and payments are required by law to be fully disclosed as part of the advice process, as well as any bias towards one Scheme or another and the reasons for it.
Back in the late 80’s when I worked for a law firm in Dunedin we used to do free Wills for clients, partly because Wills are crucially important but also because it got new clients through the door and possibly led to paid work later on. These days many AFAs do free KiwiSaver plans for similar reasons. Joining KiwiSaver is not quite in the same league as having a legally binding Will, but it’s helping many New Zealanders develop a savings habit and build up an asset that they wouldn’t otherwise have had.
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 8703838. The information contained in this article is of a general nature and is not intended to provide personalised advice. If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.
Publishes in the Hawkes Bay Today 30 October 2012