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Who gets my KiwiSaver if I go bankrupt?
Q.           I have built up a tidy balance in my KiwiSaver over the past 6 years as an electrician with a large company. I am keen to become self-employed so that I can have more flexibility for my family. I am planning to continue with my KiwiSaver to help me save and of course get the Member Tax Credits each year. Looking at the downside, if things turned to custard and I went bankrupt, could creditors get their hands on my KiwiSaver? I’m not expecting failure, but I’m the kind of person who likes to tick all the boxes.
A.            Good on you for looking at both the upside and downside of self-employment. Too many people get excited about the obvious benefits and gloss over any potential problems. Becoming self-employed is a big step for someone who has been an employee, and there are risks involved. Many self-employed people choose to put their home and other significant assets into a family trust, or use a company structure for their business. You should seek advice from your lawyer and accountant on what’s best in your situation.

As far as your KiwiSaver account is concerned, it is an asset like your house and car but it is not as easy to cash up. If you go to website of the Insolvency and Trustee Service (operated by the Ministry of Business, Innovation and Employment) you will read that “Any KiwiSaver/ superannuation schemes you own become the property of the Official Assignee once you are adjudicated bankrupt. Once accepted into bankruptcy, these will be surrendered (subject to the rules of the scheme) and the balance held in your account will be recovered by the Official Assignee for the benefit of your creditors. Therefore, you will not be able to access the funds from the date of your adjudication.” 

That sounds clear enough, however, the phrase “subject to the rules of the scheme” is crucial. Any application for a withdrawal has to be approved by the trustee of your KiwiSaver Scheme. Apart from permanent emigration or death, KiwiSaver funds can only be released early in the case of ‘significant financial hardship’ or serious illness. In the case of financial hardship, Government contributions cannot be accessed, just the member’s own and employer contributions.

Bankruptcy may be regarded as ‘significant financial hardship’ but if the proceeds are paid to creditors they will not help to relieve the hardship of the owner. The KiwiSaver Act does not deal specifically with bankruptcy, and neither does the Insolvency Act. This has become a troublesome issue for both trustees and the Official Assignee. In fact, the Official Assignee is seeking a declaratory judgment against Trustees Executors Ltd, as the trustee for two bankrupts whose KiwiSaver funds the Official Assignee is seeking to access. The matter will be heard in the High Court in Wellington on 24 and 25 February. The court’s decision will provide guidance on future handling of this tricky situation. While it may seem reasonable for a bankrupt person to retain their retirement savings, if KiwiSaver is deemed untouchable some people at risk of business collapse may be tempted to cash up assets and divert large sums into their KiwiSaver account in case they go under. As it currently stands, there is no limit to the amount that a person can put into their KiwiSaver.
Fast forward to age 65 and all bets are off. Anyone over the age of 65 who has been in KiwiSaver for at least 5 years is able to access their funds, so there is no trustee standing between you and the Official Assignee. KiwiSaver funds (including Government contributions) will be gathered up with all your other assets and used to repay creditors. 
Fair or unfair? This inconsistency highlights the need for clarity around this issue for all parties involved.