KiwiSaver is a widely adopted retirement savings scheme in New Zealand designed to help individuals save for retirement. The government established this individual savings scheme to provide financial support for retirement, funded by KiwiSaver participants, contributions from employers and the New Zealand government.
To encourage KiwiSaver participation, the New Zealand government created a policy where employers are legally obliged to pay 3% on top of participants' salary. Also, the New Zealand government contributes 50c for every $1 KiwiSaver participants contribute, up to $521 a year.
Because KiwiSaver funds are supported by the government and employers, participants can only make withdrawals in specific circumstances, such as financial hardship.
Unfortunately, the recent Financial Market Authority’s (FMA) annual KiwiSaver report showed that there has been a significant increase in hardship withdrawals and savings suspensions compared to the previous year. This trend raises concerns about the financial stability of households in New Zealand and the possible effects on individuals' savings for retirement.
This article aims to shed light on the reasons behind this surge, its impact on individual KiwiSaver members, and the broader implications for the scheme.
The Significance Of Withdrawing KiwiSaver Funds Before Retirement
KiwiSaver is a retirement savings program where employers and the New Zealand government also assist you with funding your savings to encourage participation. Withdrawals, therefore, can only be made in specific cases before the age of 65. One of these circumstances is financial hardship, which many KiwiSaver participants are experiencing due to the current cost of living crisis. The Inland Revenue Department (IRD) provides a list of criteria determining what qualifies as financial hardship, listed below;
- Cannot meet minimum living expenses
- Cannot pay the mortgage on the home you live in, and your mortgage provider is seeking to enforce the mortgage
- Need to modify your home to meet your special needs or those of a dependent family member
- Have a serious illness or Need to pay for medical treatment for yourself or a dependent family member
- Need to pay the funeral costs of a dependent family member.
Unfortunately, many people are withdrawing their KiwiSaver contributions this year due to financial hardship. Withdrawing KiwiSaver contributions negatively affects your retirement savings because of the Time Value of Money (TVM). TVM is a concept that money is worth more now than in the future due to its earnings potential through investments. Meaning when you withdraw funds from investment portfolios like KiwiSaver, you lose any interest on future capital gains. The longer your money remains invested, the more time it has to grow through compound interest.
National Capital recognizes that unexpected situations may force individuals to take this step. However, as a professional recommendation, it's advisable to exercise caution and consider other options before making such withdrawals.
What Is Causing This Rise In KiwiSaver Withdrawals And Suspensions
In addition to the increase in KiwiSaver withdrawals, there has also been a rise in KiwiSaver suspensions. Both of these actions can lead to significant losses in your retirement savings. A KiwiSaver suspension allows you to temporarily halt your regular contributions for a set period of time. However, it's crucial to note that you will not receive any contributions from your employer or government during this period, which can negatively affect your savings in the long term.
Recent data from the FMA KiwiSaver Report shows that withdrawals due to significant financial hardship have increased by 37%, reaching a total of $145 million. This is comparable to the levels seen in the past two years of, 2020 and 2021, which were marked by economic uncertainty due to Covid-19. Regulatory bodies suggest that the recent rise in suspensions and withdrawals can be attributed to the current economic climate, which has yet to fully recover from Covid-19 and cyclone events in the upper North Island.
Moreover, while the rise in percentage may appear notable, experts emphasize that the count of people taking hardship withdrawals constitutes only a minor fraction of the 3.5 million members enrolled in the program. Furthermore, the withdrawal activities of other KiwiSaver participants will not impact your fund's performance.