Although being a first homeowner or retiree may be a foreign concept to kids, it’s never too early to start saving. Many parents try to give their children a head start through setting up savings and investments from early in their lives.
KiwiSaver is just one of many savings options. With the government no longer offering the $1,000 kickstart for new members – is KiwiSaver still a good option for kids?
Let’s take a look at some of the pros and cons of KiwiSaver for kids to help you decide.
To start – KiwiSaver is accessible – much more so than starting an investment in a managed fund. Moreover, unlike some other managed funds, KiwiSaver does not require a minimum investment. Some providers like Juno and Craigs Investment have waived the membership fees for those under 18’s.
Next, the power of compounding interest on long-term investing means that you can amass significant savings over time. Let’s say Jimmy puts $10 each week from the age of zero until 65. If his net returns are 3% and we assume monthly compounding, Jimmy will have $103,279.35 at retirement. This is solely through his weekly $10 deposits and does not include the savings he accumulates through his earnings. If we keep everything the same, except this time Jimmy delays putting in $10 each week till he is 18, his value at retirement will be $53,067.77 instead. That's half of what we could have had!
Other than the monetary advantages, KiwiSaver can get kids in the savings habit early on. If you wait until they start earning, they might have a higher chance of opting-out and finding other reasons to use the money they would have otherwise contributed to KiwiSaver. On the flip side, if they already have a KiwiSaver account, that account is up and ready to go when they start earning.
Since kids won’t be earning and contributing yet, the main concern for opening a KiwiSaver account is fees. If a KiwiSaver account isn’t topped up, admin and management fees might just eat into and erode their balance over time. Providers typically charge a fixed annual fee between $25 and $40 no matter how big the account is. If the fees charged outweigh the return, you may end up with a negative investment.
Some KiwiSaver providers have addressed this issue. As mentioned earlier, Juno and Craigs Investment Partners do not charge fees for under 18’s. Simplicity has also removed their $30 membership fee for under 18’s but will still charge it’s fund management fee of 0.31% (Source: Simplicity). Moreover, Aon charges a lower membership fee of $40 instead of $49.80 for under 18’s (Source: Aon).
Besides the $1,000 government kickstart incentive no longer being available, kids also do not receive the government member tax credits (government contribution). Adding to this, if kids start working before 18, employers are not obliged to match KiwiSaver contributions until they turn 18.
The final con for kids in KiwiSaver is that KiwiSaver is a relatively inflexible investment. The only opportunities for withdrawing your KiwiSaver account is for buying your first home or at retirement. This means that the funds cannot work for things like education.
KiwiSaver is about goals
KiwiSaver is all about goals. Although first home or retirement goals may seem like a lifetime away for kids, the years will fly by. Before investing in KiwiSaver, figure out what the goal for that money is and how soon they’ll need it back.
We’ve taken a look at both the pros and cons of a KiwiSaver account for kids. Do you need help in deciding what is the best option for your child and their goals? Is KiwiSaver the right investment to get them there?
On the other hand, are you looking for KiwiSaver advice yourself? Maybe you’re looking forward to buying a home or are approaching retirement. National Capital believes all New Zealanders deserve to be financially secure and the first step is in maximising our KiwiSaver opportunities.
Have you maximised you and your family’s KiwiSaver opportunities? Don’t delay, by filling in a 15 minute online KiwiSaver HealthCheck, you are well on your way to receiving KiwiSaver advice that is tailored to your current circumstances and future goals. Being in the right KiwiSaver fund for your situation can mean you end up with thousands more when it comes to withdrawing your funds.
Do you have a specific question? Submit your question on our FAQ page and we will get back to you as soon as possible. Or call us on 0800 800 315.