Personal finance and KiwiSaver columnist at the NZ Herald

KiwiSaver: Looking for a DIY option on KiwiSaver


Using super as business start-up not possible but there is still some ability to put together a similar scheme.

Photo / Thinkstock
Photo / Thinkstock

In Australia, where contributing to superannuation is compulsory, there is an option for DIY super funds, ie you manage it yourself.

It can be a more costly option in terms of the hoops to jump through for compliance but does give you more freedom around choice of investment.

In my view the real goals of KiwiSaver are twofold:

Firstly to ensure that retirement savings are exactly that and inaccessible until you should need them for their agreed purpose - retirement funding.

Secondly, it feels like the thin end of the wedge to compulsory super in NZ (which I support).

The first point is the most important as I think this would provide the opportunity (if New Zealand had DIY KiwiSaver) to indeed use the funds saved to date for a business start-up.

The key is that the funds are locked away until age 65.

If the KiwiSaver fund was to own the business then the funds and their increasing value as well as dividends would be locked in the KiwiSaver fund as required.

In that structure the funds in the KiwiSaver fund have not been withdrawn but just invested in an unlisted business.

There are obvious issues about concentration risk as, if the business does not go well, then you have risked the majority of your savings, ie your savings portfolio lacked diversification.

This approach could also allow gearing of the portfolio (Grosvenor Financial Services Group, for example, has a geared KiwiSaver fund).

I have been thinking about being able to set up my own KiwiSaver fund, buying a property with some of the funds saved to date as a deposit and letting my compulsory contributions service the debt. This would put my fund at the aggressive end but with plenty of time until I am 65 aggressive is good.

As I say, I believe the key attribute of KiwiSaver is its "locked in" nature until 65.

Any reasonable investment should be able to be considered provided that should the investment be sold at a later date the funds cannot leave the KiwiSaver programme.

I put your question to the team at Craigs Investment Partners.

One of its KiwiSaver options allows you to pick and choose investments for your KiwiSaver funds.

Mark Lister, head of private wealth research at Craigs Investment Partners, says:

"The answer to this query is essentially - yes and no.

"Yes, there is some ability to put together a DIY KiwiSaver scheme, to some degree.

"Our kiwiSTART select product would, for example, allow a KiwiSaver member to target specific companies, rather than owning "a bit of everything" as many funds do.

"For example - the investor may want to direct their KiwiSaver towards Port of Tauranga, Auckland Airport and Ryman Healthcare specifically.

"Or they might choose the Vanguard Emerging Markets ETF, should they believe that emerging economies are the place to be over the next few decades, and so on.

"While this option allows some interesting flexibility for KiwiSaver members, and certainly means people have to target their savings much more directly, we shouldn't lose sight of the overarching need for portfolio diversification.

"Having said that, there will be KiwiSaver members that consider themselves quite sophisticated investors, or maybe ones that have existing investments or superannuation schemes that are invested more conservatively.

"This type of product may appeal to them, given that they have a greater desire to be more 'in control' of where their contributions go."

Craigs Investment Partners' head of client services (and resident KiwiSaver expert) Stephen Jonas also took a look at your question.

Jonas says "Wholly DIY superannuation as in Australia is not available with KiwiSaver as each KiwiSaver scheme provider needs to enter into a scheme provider agreement with Inland Revenue and an IT system capable of receiving and sending the required Inland Revenue KiwiSaver messaging.

"KiwiSaver schemes generally offer managed funds as this model enables them to offer the benefits of PIE structures.

"Self-managed funds cannot be PIEs so they are taxed at a flat 28 per cent, irrespective of the underlying member's tax rate," says Jonas.

A PIE is a portfolio investment entity and the tax rate for your investment earnings from a PIE is referred to as your prescribed investor rate (PIR). The prescribed investor tax rate is between 10.5 per cent and 28 per cent depending on your earnings and your provider will ask you for your PIR every year.

"Average balances in Australian superannuation accounts are larger than New Zealand KiwiSaver balances," says Jonas. "As KiwiSaver balances grow we think there will be more self-managed options, but with average balances of less than $50,000 it is difficult to get investment diversification other than through managed funds."

Jonas also mentions the kiwiSTART Select option offered by Craigs Investment Partners, which allows you to self-select your portfolio from a list of nominated securities.

"The list includes listed securities, including investment trusts and exchange traded funds, plus a range of unlisted managed funds.

"Investing on an unlisted private company or business presents some technical problems for a KiwiSaver scheme, key ones that come to mind are:

• Valuing the scheme at the end of each reporting year;

• Calculating taxable income;

• Paying any tax due (if there is insufficient dividend flow from the business).

"Further complications may arise if the member emigrates; would the sale of the business be sufficient to repay the member tax credit and kick-start contributions that would need to be refunded to the Inland Revenue?

"Furthermore, any investment needs to be compliant with the underlying trust deed.

"KiwiSaver deeds need to be supervised by a licensed trustee.

"This adds cost and complexity to the structure, as the trustee would need to be satisfied that the business was an appropriate asset for a KiwiSaver scheme."

• Disclaimer: Information provided is stated accurately to the best of the respondent's knowledge at the time of publication. It is general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice specific to their situation before making an investment decision.

To have your KiwiSaver questions answered by the Herald's panel of industry players email Helen Twose,

- NZ Herald

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Personal finance and KiwiSaver columnist at the NZ Herald

Helen Twose is a freelance business journalist who writes regularly about KiwiSaver and entrepreneurial companies. She has written for the Business Herald since 2006, covering the telecommunications sector, but has more recently focused on personal finance and profiling successful businesses.

Read more by Helen Twose

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