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Retirement

June 17, 2022

Switching KiwiSaver: When Should You Do It and How Does It Work?

If you’re like many Kiwis, your KiwiSaver plan might just be a hazy concept chugging away in the background, rather than something you give much thought to. However, it’s worth taking a moment to make sure you’re in the right KiwiSaver plan for you, as this will play a big part of your future wealth.

Here we’ll cover why you should bother to engage with your KiwiSaver, what it actually means to switch, when the best time to make a change is, and how lengthy and difficult the process is (good news - the answer is ‘not very’).

Why bother thinking about your KiwiSaver?

Not many people engage with their KiwiSaver. In the 12 months to April 2021, the total number of transfers between different KiwiSaver providers was just 157,679 - roughly a third of the number of switches made each year between power companies. This is despite the fact an investor may save 10s of thousands in fees over an investment lifetime by moving to a better value KiwiSaver plan (far more to gain than changing power companies).

To boost this engagement, last year the Financial Markets Authority (FMA) launched a new annual campaign, “Looksee”. This was, to encourage KiwiSaver members to engage with their KiwiSaver statements and check they’re in the right fund for their needs. During the campaign, members were encouraged to ask themselves:

  • Am I in the right KiwiSaver fund?

  • Can I afford to contribute more?

  • Am I getting good value from my KiwiSaver provider – do their fees seem reasonable?

  • Am I happy with the amount of money I’ll have in my KiwiSaver at age 65?

When members did make changes after reviewing their KiwiSaver, almost 39% switched to a higher-risk growth fund – a figure that is similar to those who did the same in 2019 (34.6%) and 2018 (40.7%).

The takeaway? Becoming more engaged with your KiwiSaver is rare - but if you do, it’s pretty likely you’ll end up finding a better option that will really benefit you over the long term.

KiwiSaver jargon, explained

Now that you’re intrigued, let’s tackle some KiwiSaver jargon and common features. Imagine us pushing a pair of spectacles up our nose...

  • Provider: A common urban myth is that your KiwiSaver money is sitting with the government. Actually, it’s managed by one of over 30 licensed providers - like us! Hi, we’re Kernel and this is the Kernel KiwiSaver Plan.

  • Scheme/plan: You can think of a KiwiSaver ‘scheme’ or ‘plan’ as the overarching account offered by a provider. Say to yourself “I am joining the Kernel KiwiSaver Plan.”

  • Offer: Within a plan is an ‘offer’ – this is the range of investment options that you can choose from within the plan offered by the provider. All the important details are contained in a 12-page document called the Product Disclosure Statement. Typically, you can choose between ‘offers’ (often diversified funds) which are categorised with names such as ‘Conservative’, ‘Balanced’ or ‘Growth’.

These categories are based on the proportion of growth assets (shares, commercial property etc.) that they hold. The lower the proportion of growth assets in the fund, the lower the long-term expected return is - but also, the lower the expected volatility – ups and downs. On the flip side, the higher the proportion of growth assets, the higher the expected return and volatility.

Some providers have a wider range of options – for example at Kernel you can select ourHigh Growth Fund or create a custom KiwiSaver plan with a mix of our funds.

Within KiwiSaver, you will often see 5 main diversified fund categories defined by the Retirement Commission as:

  • Defensive funds: invest 0% to 9.9% in growth assets.

  • Conservative funds: invest 10% to 34.9% in growth assets.

  • Balanced funds: invest 35% to 62.9% in growth assets.

  • Growth funds: invest 63% to 89.9% in growth assets.

  • High Growth/Aggressive funds: invest 90% to 100% in growth assets.

Default: You may have heard the term ‘default KiwiSaver’ - in fact, you may even still be in one! When someone joins KiwiSaver for the first time without choosing their provider themselves, they will often be randomly allocated to one of a handful of providers that are assigned ‘default’ status by the Government.

Originally, everyone with a ‘default’ KiwiSaver was put into a Conservative Fund, with low exposure to growth assets. However, at the end of 2021, the setting for default funds was changed to ‘Balanced’. There’s nothing wrong with being in a default fund, but equally, it is probably not the best option for you.

Contribution rate: This is the percentage of your salary that you put toward your KiwiSaver plan. You can elect 3%, 4%, 6%, 8%, or 10% of your salary through your employer. If you contribute, your employer is required to contribute at least 3% as well. Increasing your contribution rate is one of the most powerful ways to grow long-term wealth, which makes sense - the more you put in, the more you’ll eventually get out.

Government contribution: Every year, the Government matches every $1 you add to your KiwiSaver with a $0.50 contribution, up to a maximum of $521. If you’re an employee, your KiwiSaver contributions will likely be enough to get the full $521 per year without needing to do anything else. There are a few technicalities:

  • To be eligible you'll need to have been in KiwiSaver for a minimum of 12 months, but if you join during the year you'll still receive the Government Contribution for the proportion of time since joining.

  • The contribution is calculated over the 12 months to June 30th.

If you’re one of the more than one million members who don’t contribute to your KiwiSaver account, you should at least consider making an annual one-off contribution of $1,043 before June 30th, which will turn it into $1,564 when the Government Contributions received. Where else can you get a 50% return!

Thankfully, the definitions are now over and we can get into the good stuff.

What does switching your KiwiSaver mean and why do it?

When it comes to KiwiSaver there are two switches you can make (which, of course, you can also make simultaneously):

  1. Switching between providers

  2. Switching between investment funds (offers)

If you’re unhappy with your current KiwiSaver provider, or you think you might find a plan that’s better aligned with your goals elsewhere, then it might be time to switch providers.

It may be time to switch your KiwiSaver fund if your circumstances have changed, for example going from a conservative fund to a High Growth Fund after buying your first home.

Let’s dig into switching a little bit more…

When should I switch my KiwiSaver fund?

First home purchase and retirement

There are two main life events when you can withdraw your KiwiSaver balance – a first home purchase, and on reaching retirement age.

As you get closer to either of these, you may want to lower the risk profile of the fund you’re in. For example, if you’re planning to buy your first home in the next few years and want to use your KiwiSaver balance as part of the deposit, then you typically wouldn’t want to be in a High Growth Fund - instead, consider a conservative or defensive fund.

But why not?

Simply put, a High Growth Fund will have larger ups and downs. They’re great if you have time on your side to ride through the motions of the market or are happy to delay due to the markets if required, as this is likely to result in higher long-term returns. However, if you need to cash out your balance soon, you don’t want to find yourself in a ‘down’

Another key insight for many is that when you reach 65 years old, you can start to withdraw at your discretion from KiwiSaver. However, this is the start of retirement, not the end, and you are not required to withdraw some or all of your balanceimmediately. In fact, it might be the right choice for you to leave some or all of your KiwiSaverbalance invested and in a High Growth fund as your retirement can stretch over 30+ years!

On the flipside, a defensive or conservative fund composed of cash and/or bonds is likely to give you a lower return over the long-term, but it’s more likely you will have the money there when you need it. (You certainly want to be in a conservative or defensive fund when signing a Sales & Purchase Agreement).

if you aren’t looking to cash out your KiwiSaver anytime soon, consider a fund that will maximise your future balance. For example, if you have already purchased your first home, then you may not be able to access your KiwiSaver balance for several decades. That is plenty of time to ride the ups and down of the market and therefore should consider a High Growth or Growth Fund to maximise your future retirement savings. The comparative stability of the cash and bond investments will likely just reduce your final balance.

Switching KiwiSaver because of market uncertainty

Sometimes KiwiSaver members switch funds not because their personal circumstances have changed, but because of uncertainty in the market. In March 2020 there was record switching as investors switched to conservative funds, panicked at the impact of COVID-19 on the stock market. These investors sold portfolios of shares after those shares had fallen in value, turning those shares into cash.

What happened next? The market recovered and went on to new highs. The investors who panicked and switched to conservative funds effectively “locked in their losses”, missing out on all of that market recovery.

In short, it is generally considered wise to switch due to changes in personal circumstances not market timing! Your KiwiSaver is a long-term investment, typically lasting for decades. Don’t worry too much about ups and downs in the market, because they won’t last forever.

Equally, there’s less concern about locking in losses if you are changing from a lower risk fund to a higher risk fund ifit aligns with your personal circumstances. When you switch, you will be moving from cash into shares which have higher risk but higher long-term expected returns.

How easy is it to switch KiwiSaver providers and funds?

You might think the idea of switching your KiwiSaver provider or fund makes sense but are put off by the extra effort. So how cumbersome and time-consuming is it? We looked at the steps along the way and can confirm some pleasant surprises.

In general, switching between KiwiSaver providers is easy and reasonably quick (it takes up to 10 business days). Changing investment styles can take just a few days.

Steps and considerations for switching your KiwiSaver provider

1. Decide what matters to you

For most of us, KiwiSaver will be a multi-decade investment account. You will want to consider the type of investment style that you prefer to be managing your money over that time, such as owning the market through index funds or whether you want active management.

You may also want the flexibility to adjust the investment strategy to suit your specific needs and tastes, be it control over the investment mix, or being able to pick a strategy based on your values, for example ESG or sustainable investing strategies.

2. Research your options

There are now over 30 different KiwiSaver providers in New Zealand, ranging from legacy providers like the big banks, through to new and innovative disruptors (that’s where Kernel fits in).

At the peak in 2013/14, the top 5 largest KiwiSaver providers controlled 76% of the market. Since then, they’ve lost over 10% market share. This is accelerating as Kiwis become more engaged with their KiwiSaver, look for better value options, and are switching to newer and more technology-enabled KiwiSaver providers.

3. Fees

No one can control the performance of the market, and being with a higher fee provider has not proven to lead to better results - in fact, it’s usually the opposite. Fees have a big impact on investment returns over time, so make sure you review all the fees and taxes you pay with your current provider and the provider you’re considering.

4. Incentives

This is a ‘what not to do’: Don’t pick a KiwiSaver provider based on incentives! That might look like going in a draw to win a share of a pot of money, or some sort of sign-up bonus. Making a decision to switch to a new KiwiSaver provider because of a one-off incentive is not a wise decision. Instead, pick one that aligns with your long-term goals.

5. Short-term results

Another ‘what not to do’ - don’t switch to a new provider simply because it had a better return last year. The most common saying in finance is “past performance is no indicator of future performance.” Persistently high returns are very rare, as no one can control or predict returns. Focus on what you can control when switching providers, as this will set you up for the best long-term success.

How does switching providers actually work? 

Once you’ve decided on a new KiwiSaver provider, you simply need to open up an account with that provider. This can usually be done online, and you’ll need to allow about 5 to 10 minutes to complete the process. You’ll also, and need have a valid email address, an NZ drivers licence or passport, your IRD number, and current residential address.

Once you have opened the account with your new preferred KiwiSaverprovider they’ll do the rest. You don’t even need to close your previous account.

Behind the scenes, the IRD will be notified of the switch request, a notice to your existing provider will be sent, and finally the transfer process will be initiated.

As soon as the request to switch providers is delivered to the IRD they will change the provider status in their records. Your contributions will now automatically be sent to your new KiwiSaver provider. Then it is just a matter of waiting for your existing KiwiSaver balance to transfer over from your previous provider.

The time it takes for your KiwiSaver balance to transfer is up to 10 business days, depending on how quickly your previous provider completes the transfer.

How does switching funds actually work?

Changing your KiwiSaver investment mix and switching fund styles only takes a few days, and it can generally be done online.

When you request to change fund style, your investments in the initial fund are sold, before the balance is transferred to the new fund.

Switching KiwiSaver - the summary

Take a look at your KiwiSaver, because you could save a significant amount of money through switching to a provider with lower fees, or swap to a fund that’s more aligned with your goals. It’s quick and reasonably painless, too.

If you don’t think your projected balance will be enough to give you the kind of retirement you want, here are a few suggestions from the FMA:

  1. Increase your contributions. This makes the most dramatic difference.

  2. Switch to a more growth-oriented fund. This can be a good option if you’re far away from cashing out your balance, and it can improve your long-term projected retirement balance. However, it does come with more expected fluctuation.

  3. Talk to your KiwiSaver provider or consider getting some financial advice from a qualified adviser.

Dean Anderson

Founder & Chief Executive

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Indices provided by: S&P Dow Jones Indices