Bankrupts will be able to keep the money in their Kiwisaver accounts under a new court ruling.
The Court of Appeal has found Kiwisaver funds cannot be claimed by the Official Assignee to pay debts, overturning a previous High Court ruling.
The decision will mean more than 5500 bankrupts will be able to keep Kiwisaver funds totalling more than $27 million.
In the judgment released today, the court upheld an appeal by Trustees Executors Limited (TEL), in relation to two Kiwisaver accounts held by bankrupts which the company had refused to release to the Official Assignee (OA).
The High Court had previously ruled the funds would be considered "property" and were vested to the OA at the time the account holder was made bankrupt.
But it said funds couldn't be withdrawn immediately under the "significant financial hardship" clause.
Instead, creditors would have to wait until the bankrupt turned 65 to claim the funds. As most bankrupts are under 50, many creditors would wait more than 15 years for the money.
TEL appealed against the finding that the funds would be vested in the OA, while the OA cross-appealed against the early withdrawal finding.
In one of the cases under appeal, the unamed bankrupt was aged 25 and owed debts of $26,254. He held no assets, other than $11,860 in Kiwisaver funds.
The second bankrupt was 34, and owed more than $32,000. He also had no assets other than a Kiwisaver account with $10,805, and a small tax refund.
The court said if the Kiwisaver Act (KSA) allowed for the use of funds for the benefit of creditors, "the important social and economic purposes of the KSA would be undermined and the burden of providing for the welfare of individuals would fall back on the state".
It concluded a bankrupt's Kiwisaver investment, including any funds accumulating during the bankruptcy, do not pass to the OA.
Even if it did, the court found the early withdrawal clause would not apply, leaving the "impractical and ineffective remedy" of waiting several years to claim the funds.
The Court of Appeal acknowledged the decision would have wider consequences for all bankrupts who held Kiwisaver funds.
The OA said as at January this year, 5559 bankrupts had KiwiSaver accounts with an average value of $6070, and a total value of $27.3 million.