Rash spending a real risk

Surveys show half of retirees who have withdrawn their KiwiSaver funds at 65 have blown the lot on holidays and other spending. Photo / Martin Sykes

All the noise in the superannuation debate has been about the need to save and plan for increasingly long retirements, or at least long lives after 65.

That was certainly the focus in the debate about the cancellation of the KiwiSaver kick-start in the Budget and the contribution freeze for the Superannuation Fund.

But another issue is rapidly creeping up on KiwiSavers and the Government: what should be done with these KiwiSaver pots once they're free to be dipped into at 65?

It's already pertinent for thousands of over-65s. KiwiSaver is in its eighth year and the baby boomers have only just started retiring, but the numbers withdrawing funds are rising quickly.

IRD figures show 65,336 KiwiSavers had withdrawn their money by the end of May, almost double the number at June 2013, the first year retirees could realistically withdraw given the initial five-year moratorium.

More than a million New Zealanders will turn 65 over the next 20 years. They are expected to live for at least a further 20 years and people in their 20s can now expect to live an extra 30 years.

The money they could in theory withdraw on their 65th birthday will be considerable.

There is already $28 billion in 2.5 million KiwiSaver accounts and the New Zealand Society of Actuaries estimates that more than half of them will have $100,000 - in today's money - they could withdraw in 25 years.

So what are retirees doing now with their pots of gold? Some surveys show that a third had withdrawn all their money as soon as they could and half blew it on a holiday or spending, with another portion reinvesting their funds elsewhere.

This raises some risks.

Could poorly advised retirees, or those not advised at all, either blow their money or put it into the wrong places, destroying the whole point of KiwiSaver?

Could some of the money be withdrawn and then put into rental properties, further inflating house prices?

The actuaries have addressed these matters in a paper which looks at the risks, particularly given that annuities which would use these pots to provide a guaranteed income for life are not available in New Zealand.

It points in particular to the lack of readily available and inexpensive independent financial advice.

The demise of finance companies made big inroads on the the financial advice community; and the matter of commissions remains unresolved, although an official review is under way.

The danger is that financial advisers or the banks are incentivised by commissions to mis-sell expensive savings vehicles to retiring KiwiSavers.

One option suggested by the actuaries is a state-sponsored annuity, but they say the Government should make any decision quickly to avoid stifling the creation of a commercial market.

New Zealand's universal pension and simple and relatively cheap KiwiSaver savings system is widely admired throughout the world.

Our high home ownership rates mean most nearing retirement in the next decade are in reasonably good shape, although they do need safe and simple financial advice.

Beyond that the risk is that the younger KiwiSavers of 2015 arrive at 65 in 20 years to find themselves without a home, without enough savings and without the right advice to use the pot they do have.