Q) I am no longer working but keep hearing I should start a KiwiSaver and put the minimum contributions in to benefit from the government kickstart and annual contributions. How do I go about finding a suitable conservative KiwiSaver that won't eat away at the proceeds with fees and charges. I am finding it difficult to find out these costs.
A) I don't know how old you are or whether you plan to return to paid work at some point but yes for the NZ$1,000 kick-start and NZ$521 a year in member tax credits, most financial advisors would argue that KiwiSaver is a worthwhile investment. Keep in mind that to receive the maximum member tax credits you need to put in a minimum of NZ$10.06 NZ$20.05 a week yourself. There is no limit to what you can contribute yourself, but the tax sweeteners max out at that level.
In terms of choosing a low fee provider that also delivers decent returns, a good place to begin your research is here on our website. I'm assuming that you are close to retirement age given your preference towards a conservative fund. Given the reduced volality (and therefore lower risk) with these funds, this is probably a wise choice if you are nearing 65.
As a starting point to your inquiry, I would direct you to this link profiling the conservative KiwiSaver funds on the market which show relative fees and performance. The top image shows the distribution of expense ratios (that's a percentage of what gets lopped off your balanced) associated with these funds, so you can get a sense of what's high, what's low and what's average. You'll notice that the bulk of these funds charge somewhere between 75 and 100 basis points (i.e. 0.75% to 1%) in terms of fees and expenses. I would suggest that anything above 100 basis points (1%) on a conservative fund is bordering on high given that these funds consists mainly of cash and fixed interest assets.
For a more detailed explanation of what those fees and expenses on KiwiSaver encompass and how they break down, read this link.
As for performance, these conservative funds, relative to other types of funds with a higher weighting of shares, have done quite well. The second image on that first link I referred to above to show the distribution of adjusted (that's after fees and expenses) investment performance for conservative funds. The majority fall in the 2-4% range for an adjusted performance. That's the return we have calculated you'll get after fees and expenses. (To see more about how we have calculated adjusted performance click here). You'll see some in the 4-6% range as well which is a strong performance. Keep in mind that's for the latest year going back from the Dec.31 quarter 2011.
One year performance figures are not indicative of a fund's long-term performance which can fluctuate a lot from year to year, less so with conservative funds. You'll want to look for a pattern and for that I suggest you go next to our performance ranking section which goes back three years. You can also check out Morningstar's KiwiSaver reports which have four-year performance. Remember they are averaging out what your fund has delivered over a period of four years.
And finally, check out the relative fees (expressed as a total expense ratio) here in our comparative conservative fund profile previously linked to above.
One more tool I would draw your attention to is our minimum contribution calculator which shows you the effect of not contributing to your KiwiSaver in the event that you suspend your contributions. Keep in mind that the fees will continue to come out year on year. You can find it here in this story as a downloadable excel spreadsheet where you can adjust the inputs to fit your circumstances.
And for the long-term effect of fees, see also our cost benefit calculator. Sorted also has their own version to calculate the long-term effect of fees. Check that out here on their calculator page. Please note it's under construction so won't be up and running till April 2.
I hope this is helpful for you. Good luck.
6 Comments
Thanks Shane. Yes, I was working off old numbers. It's .50 cents on the dollars now so $20 a week is correct. Here's the KiwiSaver link for whomever is interested.
http://www.kiwisaver.govt.nz/new/benefits/mtc/
How much member tax credit you can get
The maximum annual member tax credit you are entitled to is:
- $1,042.86 for periods up to and including 30 June 2011
- $521.43 from 1 July 2011 onwards.
To get the full member tax credit automatically you have to contribute at least $1,042.86 a year. Employer contributions and government contributions do not count towards eligibility for this credit.
From 1 July 2011 the Government will pay 50 cents for every dollar of member contribution annually up to a maximum payment of $521.43. This means that you must contribute $1,042.86 annually to qualify for the maximum payment of $521.43.
If you contribute less than $1,042.86 from your pay, you can makevoluntary contributions to ensure you receive the full member tax credit payment from the Government.
Amanda
Hummmmm ??
You also have the Westpac capital protection plans listed as conservative ?? yet Morningstar list them as aggressive . Looking at the Westpac website the capital protection plan is a fund 100% in the share market with a capital protection element if you stay within each fund for the duration of the 10 years each fund is taken out for. Shares in my humble opinion are not conservative however the capital protection element does give a element of security
Hi Shane
I am responsible for looking after the Kiwisaver databases and research so thought I would jump in here and provide the rationale for putting the Westpac Capital Protected product(s) in the conservative category as opposed to classifying them aggressive as some others have (e.g. Morningstar).
As you allude to above there is an element of security for investors provided by the capital guarantee. It is principally for this reason that we have categorised the fund(s) as conservative as opposed to aggressive.
We have also presumed investors will remain in the product for the minimum period (i.e 10 to become eligible for the guarantee) and therefore there is an element of certainty around the return of capital at maturity. The guarantee is provided by Westpac - chances of them defaulting would be small in my opinion (others may not agree).
As I see it, as long as you do not withdraw (or switch) from the fund, and you qualify for the capital guarantee there is plenty of potential upside and very little downside.
Readers also need to be aware that the capital guarantee is being paid for by investors through higher ongoing fees.
I hope this helps.
I love this quote from Barton Biggs ( Hedge Hogging , p. 121 ) :
... " During the 1980's and 1990's the U.S. mutual fund model created great wealth for its purveyors - the investment management companies , the brokers , and the portfolio managers - but utterly failed America's individual investors . "
...... just sub in " the 2000's & 2010's " ....... " NZ Kiwsaver " ....... and " utterly failed New Zealand's individual kiwisavers "
..........Chris Davis paraphrases Winston Churchill when he says " Never in the course of financial commerce has so much been paid to so many for so little " ........equally so for Kiwisaver funds , when the meagre returns do not even match the CPI rate , let alone the investment indexes ....
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