Joseph Darby questions whether some people are putting too much money in KiwiSaver, noting there's no illiquidity premium in exchange for reduced access to capital

By Joseph Darby*

Above the minimum needed to capture the employer match and the government contribution, if eligible, every extra KiwiSaver dollar is locked away for decades with no premium for surrendering access. Investors elsewhere get paid for illiquidity, KiwiSaver members do not.

Picture a household. Mid-40s with household income of $200,000 plus, contributing more than the KiwiSaver minimum to a couple of KiwiSaver accounts, mortgage largely under control, family home and KiwiSaver balances making up almost all the long-term wealth. By any reasonable test, they are doing the saving part well.

What they cannot do is reach any of their wealth before 65 without selling the house, applying for a hardship withdrawal, or leaving the country.

Public debate about KiwiSaver almost always assumes the question is whether contribution rates should rise. The contribution-rate debate is downstream of a deeper question, and the deeper question rarely gets asked. Even at the current minimum, a meaningful slice of disciplined savers are putting too much into KiwiSaver. The FMA's 2025 KiwiSaver Annual Report puts the average member balance at $36,349, which on its face suggests under-saving is the dominant problem at the population level.

The average is misleading. KiwiSaver is only 18 years old, the average is dragged down by younger members with shorter contribution histories, while most older, wealthier New Zealanders hold legacy superannuation, term deposits, investment property, and direct shares alongside their KiwiSaver. The household pictured above is in the opposite position: KiwiSaver is doing more than its share of the work, and they have no idea what they would do if a serious opportunity or family need arrived in their early fifties.

This piece is for that household.

KiwiSaver was purposely built for New Zealanders who would not otherwise save enough for retirement. The household above is not that household.

Intended audience

interest.co.nz readers will mostly know which side of the line they sit on. This is written for the saver who has surplus income beyond day-to-day expenses, is already capturing the employer match and the government contribution, eligibility permitting, and is deciding what to do with the next dollar. Or perhaps, who is already contributing more than the minimum to KiwiSaver. The primary decision for disciplined investors involves allocating capital once the potential employer and government incentives are secured.

If you are still building investing discipline, not yet contributing the minimum, or in any doubt about whether your personal savings habit is locked in, set this article aside. The automatic deductions of KiwiSaver are doing exactly what they should.

The illiquidity premium that isn't there

Across almost every other corner of finance, investors who give up access to their money are paid for it. Term deposits pay more than on-call accounts. Private equity targets returns above public equities partly because investors cannot pull capital out at will. Unlisted property syndicates and direct property holdings price below comparable listed real estate partly because they are harder to exit. The illiquidity premium is the additional compensation an investor expects in exchange for accepting reduced access to their capital. The principle is well-established and visible in almost every asset market in some form.

KiwiSaver inverts the logic. The assets sitting inside KiwiSaver accounts are among the most liquid investments available: shares, bonds, cash, listed property. They could be sold on the open market in minutes. Yet the KiwiSaver Act 2006 locks those same assets away until the qualifying age for NZ Superannuation, currently 65, with narrow exceptions for first home purchase, severe financial hardship, serious illness, or permanent emigration excluding Australia.

KiwiSaver fees are sometimes positioned as compensating for the lock-in. In practice the differential against equivalent unlocked managed funds is usually small, and investing outside KiwiSaver opens up lower-cost options anyway, including ETFs and directly held shares. No plausible fee saving compensates an investor for surrendering 30 or 40 years of access, particularly when those alternatives can be reached within a few business days. The tax-efficient PIE structure which makes most KiwiSaver attractive is not exclusive to KiwiSaver either: any multi-rate PIE fund accessible in New Zealand applies the same 28 percent cap on a high earner's investment income.

A tale of two balance sheets

Statistics NZ household net worth data for the year ended June 2024 makes the trade-off concrete. The upper-quartile New Zealand household has a median net worth of $1.04 million. Of that, the median value of the owner-occupied dwelling is $780,000, the median superannuation or KiwiSaver balance is $50,000, and the median value of other household financial assets, the third pillar, is $0.

To extend the example, consider two households at age 50, both fully mortgage-free.

1. Household A: $500,000 across two KiwiSaver accounts. No other long-term investments.
2. Household B: $200,000 across two KiwiSaver accounts. $300,000 in an unlocked share portfolio, managed fund, equity in a rental property, or some combination.

Same paper net worth above the home. The difference is what the households can do between now and then. Household B can fund a business buy-in at 53 without touching the KiwiSaver balance. Household B can underwrite a sabbatical at 58. Household B can help an adult child into a first home at 59. Household A has none of those choices.

Where each household ends up at 65 depends on what Household B does with the $300,000. The difference is everything happening before then.

Fund the mid or late-life pivot

Life rarely waits until 65, and for the example household in question, the events to plan for are usually opportunities rather than emergencies. A couple of years out of paid work at 45 to raise another child. A career pivot at 50. Buying into a business at 53. A sabbatical at 58. A health event at 60 challenging everything. Choosing to retire a few years earlier than planned. None of these arrive on a timetable respecting the qualifying age for NZ Super.

What is the point of accumulating investment assets at all, if not to enhance choice and freedom? A locked balance at 50, however large, does not enhance choice in the years when choice tends to matter most.

The cost of locking capital away grows with every additional voluntary dollar above the minimum. The third pillar, accessible long-term investments the household actually controls, is the one most KiwiSaver over-allocators are missing entirely. The third pillar can take many forms: unlocked managed funds or ETFs, directly held shares, an investment property, capital in a small business, or something else. Regardless of investment vehicle, the point is, the capital is the household's own to deploy when life requires it.

One further structural feature is worth naming. KiwiSaver accounts can only be held in an individual's own name. They cannot be held jointly such as with a spouse, via a family trust, or in any other entity. For the household above, this rules out asset-protection structures, complicates estate planning, and prevents couples from pooling long-term capital into a single jointly managed structure even when it would otherwise make sense.

The shrinking case for high earners and the self-employed

The government contribution was originally launched at $1,043 a year in 2007. It was halved in 2011, frozen for 14 years, and halved again in 2025 to a current maximum of $260.72. In real, inflation-adjusted terms, the original contribution has lost roughly three-quarters of its purchasing power. The headline incentive justifying acceptance of the lock-in is now a pale version of itself, and individuals earning above $180,000 no longer receive it at all. The $180,000 threshold is not indexed to inflation, which means more households will cross into it each year by simple wage drift.

Contractors and the self-employed face an even thinner value proposition. Without an employer to match contributions, the only external incentive is the halved government top-up. Once captured, no structural reason remains to favour KiwiSaver over an unlocked alternative. The same logic applies to members on total remuneration packages, where the employer contribution comes out of the agreed package rather than on top of base salary.

Global context: compensation for illiquidity

New Zealanders love nothing more than hearing how we stack up versus overseas.

Comparable retirement schemes elsewhere offer something in exchange for restricted access. Australian superannuation runs at a 12 percent compulsory employer contribution, taxed concessionally at 15 percent on the way in and zero on the way out after age 60. Through a Self-Managed Super Fund, Australians can use their retirement savings to purchase investment property and run a meaningful range of investment approaches inside the structure. In the United States, 401(k) plan loans allow members to borrow up to 50 percent of their vested balance, capped at US$50,000, for any purpose, repaying the loan with interest back into their own account. The Roth IRA offers fully tax-free growth and withdrawals, with contributions accessible at any time. In the United Kingdom, the Individual Savings Account allows up to £20,000 a year, all growth and withdrawals tax-free, no preservation age, no lock-in.

KiwiSaver does not have a structural answer to any of these.

Do you trust politicians?

Fortunately, the government does not hold the money inside KiwiSaver. Though it does control the rules, and it has exercised the control to tweak the scheme more or less continuously since 2007, across both sides of the aisle.

The $1,000 kick-start was scrapped under one government. The member tax credit was rebranded, halved twice, and capped, most recently to $260.72. The $180,000 individual income threshold for the government contribution was introduced at the same time. Default contribution rates have been stepped up: the minimum rose from 3 percent to 3.5 percent on 1 April 2026 and is legislated to rise again to 4 percent on 1 April 2028.

A useful distinction sits inside the pattern. Access rules, the preservation age and withdrawal triggers, have been comparatively stable since launch. Incentives have been changed repeatedly. Incentives are precisely what justified accepting the lock-in in the first place. As they erode, the lock-in remains. The bargain shifts under the saver without the saver having any way to renegotiate.

Perhaps most intriguingly, the close calls are sometimes more revealing than the changes which landed. In 2022, the government quietly proposed extending GST to managed-fund management fees inside an omnibus tax bill. Treasury and Inland Revenue were behind the proposal. FMA modelling at the time suggested the change would have wiped an enormous $103 billion from KiwiSaver balances by 2070. The proposal was reversed inside 24 hours after public backlash. It was nearly law and pulled only because of the speed and volume of the response. It is reasonable to consider that a future government, fiscally constrained, may not flip-flop at all.

This is where the lack of an illiquidity premium becomes most punishing. An investor in an unlocked managed fund, share portfolio, or other investment who dislikes a tax or other change can sell or restructure. A KiwiSaver member cannot. The capital is captive, and captive capital absorbs whatever rule changes arrive.

Disciplined retirement savers in similar countries are finding the rules shifting under them too. In the United Kingdom, most unused pension funds and death benefits will be brought into scope of inheritance tax from April 2027, exposing them to a 40 percent rate on transfer. The cash ISA contribution cap, untouched for years, drops from £20,000 to £12,000 for under-65s in the same window.

In Australia, the Division 296 tax received Royal Assent in March 2026 and commences 1 July 2026, applying an additional 15 percent tax on superannuation earnings attributable to balances above A$3 million, and 25 percent above A$10 million. After significant industry pushback the final thresholds were indexed and the unrealised-gains element removed, but a new tax on long-term retirement savings landed regardless. Both reforms target accumulated wealth, and both arrived after years of political assurance the rules would not change.

Long-term locked savings vehicles attract political attention precisely because they hold concentrated, accumulated wealth. New Zealand currently has $123 billion across 3.4 million KiwiSaver members, the largest single locked savings pool in the country. Governments of every colour have found it hard to ignore. The Retirement Commission has called for a cross-party accord on KiwiSaver to end piecemeal change. Whether any government delivers is an open question.

Concentrating long-term savings inside a structure governed by future politicians is, in part, a 30-to-40-year bet on legislative stability. The track record so far could generously be called mixed.

The counterargument, addressed

There is one good reason to over-fund KiwiSaver. For some savers, the very illiquidity framed here as a cost is the feature making the scheme work. The money cannot be reached, so it cannot be spent. Well-documented behavioural research on retirement saving consistently finds the dominant problem in long-horizon investing is not asset selection but behaviour. For savers who recognise the pattern in themselves, the lock-in is doing useful work the saver could not do alone.

In my humble experience a persistent inability to leave money invested when it is reachable is usually a symptom of something else: cashflow under stress, unstable budgeting, or unresolved non-financial habits. A retirement scheme is a poor instrument for fixing any of those. And the carve-out does not extend to the disciplined saver who tops up KiwiSaver because it feels responsible, while running successful investments outside the scheme on the side. For that saver, the behavioural argument does not apply. The real question is whether more should be locked away with no premium attached.

KiwiSaver and you

The KiwiSaver Act specifically set the purpose of the scheme: to “encourage a long-term savings habit and asset accumulation by individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement.”

It was not intended to become the dominant repository of household wealth. Once the incentives are exhausted, it competes with other long‑term investments on ordinary terms, save for one crucial difference: access.

For individuals or households with surplus capital, that means the relevant question is no longer how much can be put away, but where flexibility is lost without compensation. KiwiSaver is just one line on a household balance sheet, alongside other assets that may earn more, less, or simply remain usable when life moves faster than policy.

*Joseph Darby is a financial adviser and CEO of Become Wealth, a licenced provider of financial advice and Discretionary Investment Management Services (DIMS). This article is the author's opinion and does not necessarily reflect the views of Become Wealth. Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain a regulated financial product.