Kids in Kiwisaver
Q) I have two kids ages 4 and 7 years and was thinking of enrolling them in KiwiSaver to get them their $1,000 kickstart. Who would be a good provider to look at? Obviously fees are important as their balance will remain at around $1,000 for some years before they start working, so for example the scheme I'm in charges a minimum annual fee of $50 which would be 5% of a thousand dollars so my kids could very likely find themselves going backwards. Any ideas of where I could look.
A) Just a reminder that we did not give advice at interest.co.nz only information to help you make an informed decision.
You rightly point out the danger of losing that $1,000 kick-start to fees and poor or low returns over time. I tackled this subject previously which can you view here but here's a rehash.
As the moment there is only one KiwiSaver provider (that I'm aware of) that does not charge juniors KiwiSavers an annual administration fee and that's Westpac. Do be aware however that there are a whole slew of other charges that apply and in fact they're the more significant fees to watch over time. Read about the various fees charged in KiwiSaver here.
As I noted last week, in this interview with Morningstar's Chris Douglas, providers will (effective April 13, 2013) be forced to disclose in detail the various fees charged on KiwiSaver products. They include "fees for financial advisors, "servicing investor specific decisions", establishment fees, contribution fees, withdrawal fees, transfer fees, switching fees and special request fees. It also includes the investment management fee which is a percentage of your balance charged every year.
Given that banks are paying the break fees to attract customers from competing banks these days, I don't see why you as a KiwiSaver with money to invest couldn't demand the same when it comes time to signing up with a provider. I expect you'll get a pat "No" as a matter of course but if you go higher up the food chain, it's possible you could have some bargaining power.
In any case, before you seize upon any "fee free" offer, make sure you are told how much you can expect to be charged in other fees, on an on-going basis, all up.
I was interested to hear from Westpac that of their more than 270,000 members, 25% are under the age of 18 so they've obviously done a good job cornering this part of the market. One wonders how many of those members are aware of that fact that they do in fact pay fees, just not the administration fee of roughly $2.50 a month. By the way, that's conditional upon the junior KiwiSaver having an account with Westpac and making a minimum of one deposit a year.
To see the entire range of Westpac KiwiSaver funds complete with fees and performance date click here.
Before you enrol your child in KiwiSaver, have a good long think about your reasons for doing so. Remember that the money can't be accessed until they turn 65 so if it's for the purposes of education, KiwiSaver won't be a good fit. It it is to help give your child a leg up on the property market, then maybe it makes sense, provided it's not at your own financial detriment.
Are you planning on contributing into their account on an on-going basis? If not, as you pointed out, they could slip backwards and then what would be the point. More than 315,000 KiwiSavers are under 18 so that's more than NZ$30 million in taxpayers money at risk of being wasted.
What type of fund?
I was curious to find out where most junior KiwiSavers are invested. I couldn't canvass everyone, but Westpac informs us that of their young membership, 40-45% are in conservative funds. Given the lower investment management fees associated with more conservative funds, this stands to reason I suppose. If parents are not planning on contributing beyond the $1,000 kick-start, the higher fees associated with more aggressive funds would eat into a higher proportion of the return.
If you want to see the effect that not contribution to your KiwiSaver account will have over time, check out the contribution calculator embedded in the following story. You can adjust the variables to determine how long it would take over time, given a certain rate of return and or contribution rate (or lack therefore) before your money disappeared or gained.
Sorted.org.nz's KiwiSaver calculator might also be of interest to determine what kind of savings you might be able to achieve over a period of time with regular contributions.
Fund managers and financial planners routinely tell you that if you are investing for the long-term then a growth or an aggressive fund is the way to go because a child theoretically can afford to withstand the higher risk (and volatility) associated with it.
Matthew Goldsack, head of investment solutions for BT Funds Management, which manages Westpac's KiwiSaver, said the high proportion of under 18s in conservative KiwiSaver funds likely reflected an intention to either access those funds for the purposes of a first time home deposit later on, or else the risk profile of the parent. The majority of KiwiSavers in New Zealand are invested in conservative funds. (To learn more about the different type of funds read this).
You might find some value in discussing your question with an authorised financial advisor.
Do you have a question about KiwiSaver? Check out our extensive list of questions from other readers or drop us an email.