The problem for many KiwiSavers is often a lack of understanding of essentials versus luxuries. "It's my money and I want it." So say many KiwiSavers.
Many take it a step further and contact their KiwiSaver providers to ask to withdraw their funds.
With any long-term savings scheme ways are needed for people to get their money out in case of financial hardship or if they need medical treatment. But KiwiSavers are yet to understand how the provisions for "serious financial hardship" work.
There are plenty of genuine cases of serious financial hardship. Every year a few thousand people do manage to withdraw money from their KiwiSaver funds.
"There are a lot of people who are misinformed from word-of-mouth or are simply not aware or educated on the strict criteria for early withdrawals in general, especially serious financial hardship withdrawals," says Vedran Babic, operations manager at Fisher Funds.
Many people have no role models or experience of saving for retirement. The "it's my money and I want it" argument is common. Just type the words KiwiSaver and hardship into Trade Me's message boards to see what some people think.
What's more, there's a rush on withdrawal applications when annual KiwiSaver statements are sent out, says David Boyle, general manager of funds management at KiwiSaver provider OnePath. People see how much money they have built up in their retirement fund and dream of other uses for that money.
It's not the providers but their independent trustees who say "yes" or "no" to a withdrawal. The KiwiSaver Act spells out the exact circumstances of significant financial hardship, which include a member's inability to meet minimum living expenses or threat of mortgagee sale.
The relevant sections of the act aren't difficult to read and are worth perusing by anyone wanting to make a withdrawal. It can be found online at tinyurl.com/KiwiSaverAct.
As well as serious financial hardship it's also possible to withdraw the money in certain circumstances for medical treatment, palliative care, funeral costs, home modification for special needs, or an illness, injury or disability that makes the member "totally and permanently unable to engage in work for which he or she is suited by reason of experience, education or training".
The irony is there are plenty of Kiwis with disabilities and/or on a benefit who work hard to add to their KiwiSaver pot rather than withdraw from it. If they make minimum contributions each year they're entitled to $521 of free government tax credits.
The big problem with "serious financial hardship" is that it's subjective. David Brown Douglas, executive director of the Trustee Corporations Association of New Zealand, cites the example of a KiwiSaver whose family fridge had broken down and who bought a new one on credit. This may have been a straightforward example of serious financial hardship because the applicant couldn't afford to pay the credit card bill. "But there was also a flat-screen TV on the credit card," says Brown-Douglas. "This is the problem the trustees have."
A debt does not automatically entitle you to withdraw KiwiSaver money to pay for it, says Brown Douglas. "Clearly where action by a mortgagee against the member is contemplated the regulations are clear, but other debt requires a high degree of subjectivity."
Workplace Savings New Zealand has produced best practice guidance notes for trustees, which help them separate an acceptable request from a frivolous one.
There are people who lurch from one financial crisis to another and may come back again and again for withdrawals of their and their employers' contributions.
Pushpa Wood, director of the New Zealand Centre for Personal Financial Education at Massey University, says budget advisers to Pacific communities see KiwiSavers who view their retirement savings as a substitute for emergency funds. "For me the worrying trend is a focus on short-term needs rather than keeping this fund as a long-term saving goal," says Wood.
It's not just people at the bottom of the income scale who want to withdraw their KiwiSaver money.
One boutique KiwiSaver provider that attracts a higher socio-economic group of clients still faces several serious financial hardship applications a week.
Nine out of 10 completed applications to that provider are approved. Nonetheless, it gets applications from people who can't pay their Sky TV bills, and also people who "need" their money out to pay for a family holiday to Fiji or for private school fees. The workplace savings guidance notes specifically exclude private school fees.
The problem for many KiwiSavers is often a lack of understanding of essentials versus luxuries. The latter is subjective - although Workplace Savings New Zealand shed some light when it specifically described a plasma television as a luxury item.
The ownership of large, expensive or multiple cars also counts against a successful withdrawal. Other spending that counts against withdrawals includes school trip/camp expenses, holiday home ownership, spending more than $100 a week per person on groceries or $50 a month on clothing and Sky TV subscriptions. The notes also comment that cosmetic surgery would be difficult to justify as essential.
Several Trade Me message board posters chastised another member who "needed" her KiwiSaver money out to pay for medical insurance premiums - among other things.
"I would cut medical insurance. I also wouldn't worry about things that might not happen," said one. "If someone needs a $40,000 operation, can't they get this done via the hospital system?"
The Workplace Savings guidance suggests members should forfeit their luxury goods "subject to unaffordable financing" before qualifying for a KiwiSaver withdrawal, providing "no financial penalty arises beyond loss of the good or service".
Michael Chamberlain of KiwiSaver provider SuperLife says his staff look to verify as much of the data they receive as possible. He says "Facebook is a wonderful source of information on relationships, etc". A glance at some people's Trade Me accounts could also be revealing.
"There are some real hardship cases," says Chamberlain. "My guess is that 90 per cent of those approved are clear cut. Likewise 90 per cent of those turned down are clear cut. I am confident we eliminate those that are just trying for the easy option."
Even when a hardship withdrawal is approved, it's not always for the full sum of member and employer contributions (government tax credits and the kick-start are excluded). "The ones that we recommend are approved are very rarely for the maximum amount available," says Chamberlain.
Withdrawals aren't instant. The first step is to get all the paperwork together. The trustee will need an application form, statutory declarations, bank and credit card statements, and written evidence of income, expenditure, assets, liabilities and Work and Income entitlements. Babic says only a third of forms sent out by Fisher Funds are returned. "This is a clear indication that lots of members themselves quickly realise they do not meet the criteria or that they aren't prepared to put in the effort to gather all of the necessary documentation and submit a withdrawal request."
Those that do return the paperwork can expect the trustee to scrutinise the documents. If the bank/credit card statements show frivolous spending, there is a good chance the withdrawal application will be declined. It happens.
Anyone seriously contemplating making a KiwiSaver hardship withdrawal should visit a budgeting advice service. The service may be able to advise how to overcome the current financial crisis, and the act of seeking advice will help to prove to a KiwiSaver trustee that withdrawal is not being taken lightly by the member.
Members should remember that KiwiSaver is a long-term scheme. Some take out money yet fool themselves that they will have savings come retirement simply because they are in KiwiSaver, says Claire Mathews, senior lecturer at Massey University.
Anyone facing bankruptcy should, however, consider withdrawing their KiwiSaver funds. Once bankrupt, the Insolvency and Trustee Service is within its rights to apply for the funds to be withdrawn and paid to creditors. To date the Official Assignee has done this with $440,000 of KiwiSaver funds from 165 bankrupts.
Chamberlain has called for an independent organisation such as Work and Income to take over the decision-making on serious financial hardship cases. Others such as Mathews would like to see independent budget advisory services take that role.