KEY POINTS:
Thousands of dollars invested in KiwiSaver by people who die before retirement age may be left sitting on ice because the legal costs of getting the money out could be more than is in the fund, says a superannuation expert.
Michael Littlewood, co-director of the retirement policy and
research centre at Auckland University, said the prescriptive approach of the KiwiSaver Act meant there was no discretion to allocate small amounts of money to next of kin without having to go through the full legal process.
That involved either gaining probate, where a court has to confirm the validity of a deceased person's will, or gaining letters of administration where there is no will, and the court then allocates the inheritance based on set rules.
It costs at least $1500 to go through either process.
Mr Littlewood, who is also a trustee of the SuperLife KiwiSaver scheme, said he already had three cases in which investors had died and the money was now sitting earning interest because the cost of getting it out was more than the amount in the account.
Mr Littlewood said that in other superannuation schemes, a member could nominate who they wanted to receive their savings, and the trustee of the fund could allocate smaller amounts of money to a surviving family member on a discretionary basis.
Michael Chamberlain, principal of Aventine, which runs the SuperLife KiwiSaver fund, said his company had asked Inland Revenue for advice on the situation more than once, but was still waiting to get clarification.
"If you have got someone who dies and doesn't have a lot of assets you have got no way of paying the money out legally."
"Under the [KiwiSaver] provisions it has to be paid to the estate. But the costs don't justify the money you are going to get."
The issue is not a problem for larger estates because they must go through the legal process in any case and proceeds are likely to more than cover the costs involved.
Mr Chamberlain said as many as 600 or 700 people of the 750,000 who have signed up to KiwiSaver could have died.
He said the issue was relatively small but typical of the KiwiSaver Act's flaws because it had been drafted in a hurry by people who didn't necessarily understand superannuation issues.
Estate planning lawyer Hugh Thompson of Simpson Grierson said he did not know of any differences between other superannuation funds and KiwiSaver when it came to estate planning.
But Mr Littlewood said estate planning lawyers might not be aware of what happened with smaller amounts of money for superannuation funds because such matters might not go to lawyers.
Trustee Corporations Association executive director David Brown Douglas said the law was essentially the same for KiwiSaver and other superannuation funds but admitted the law on nominating a person to inherit a KiwiSaver investment was obscure.
An IRD spokeswoman said Inland Revenue did not have any role to play in the process.