Q. I joined KiwiSaver in July 2008 at the age of 63. I became eligible to withdraw my money in July last year as by then I had been in the scheme for five years and, of course, I was already over 65. I realised that I was no longer eligible for member tax credits and my employer contributions also stopped so I decided to take all the money out and pay off my mortgage. Was this a good thing to do? Should I have kept my account going? I am still working part-time and am now saving into a savings account at the bank. I get 4.25 per cent pa if I don't make any withdrawals but this is less than I was getting in KiwiSaver.
A. Paying off your mortgage sounds like a smart idea especially at your age. Heading into retirement mortgage-free is a good situation to be in and should help you meet other expenses which can increase as you get older such as medical bills and heating.
I assume you have been receiving NZ Super for the past two years while you have been working, and this may also have helped you pay off your mortgage. For most working New Zealanders reaching the age of 65 results in their income increasing by 30 per cent or more quite a significant change in circumstance at that time in their life. The rate of NZ Super for a single person living alone is $21,931 per annum before tax. Using this money wisely can make a big difference to the level of comfort you enjoy when you finally give up your job.
As you have found out, once a person reaches the age of eligibility (usually 65) their KiwiSaver account is unlocked and they can get their hands on their money. Unfortunately, many people have treated this as a reason in itself to clean out their account. Because you closed your KiwiSaver account by withdrawing all your savings, you can neither reopen that account nor rejoin as you are over the age of 65. There are other investment options for savers but, frankly, most of them have higher fees and will be less transparent than a KiwiSaver account. Because KiwiSaver is regulated by the government there is a high level of reporting and accountability.
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Although member tax credits and usually employer contributions stop at age 65 (or as in your case after five years of membership), there are other good reasons to keep a KiwiSaver account open.
Importantly, it provides an opportunity to diversify into investments that aim to beat inflation. Your bank savings account at 4.25 per cent pa translates to around 3.5 per cent after RWT tax at 17.5 per cent. Inflation in New Zealand has averaged 2.7 per cent since the year 2000. This gives you growth of less than 1 per cent on your savings. Compare this with the average return for conservative KiwiSaver funds at 5.67 per cent after tax over the past six years (according to Sorted's Fundfinder). There certainly is a place for bank deposits and ideally everyone should have some bank savings for the unexpected. But with people living well into their 80s, some investments beyond bank deposits are also useful and KiwiSaver is a convenient vehicle for this.
The first time someone makes a withdrawal from KiwiSaver after reaching the age of eligibility they need to sign before a JP that they have either been resident in New Zealand and therefore eligible for the MTC received, or list the periods that they were out of the country. This is to ensure people living overseas were not paid MTC that they were not entitled to. Once the first withdrawal has been made, subsequent withdrawals are easier. People can choose to set up a regular payment to their bank account while others will make occasional withdrawals for large bills or significant items such as a new log burner or overseas holiday. Rules may vary between providers, but for most as long as you keep a minimum balance your account will remain open. I am sorry that many now have some regrets, but I hope others in your situation will look at all their options before making that final decision.
• Shelley Hanna is an authorised financial Adviser FSP12241. Her free disclosure statement is available on request by calling 870 3838. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to email@example.com.