Co-author: Nicole Barratt
Thousands of New Zealanders are enrolled in default KiwiSaver schemes. Default KiwiSaver schemes are low-risk. They are designed to give you an introduction to investing in KiwiSaver, if you haven’t yet decided what KiwiSaver scheme is right for you. Canstar explains all you need to know about default KiwiSaver schemes, and why it’s important to take active steps to choose a scheme that best suits your needs.
What is a Default KiwiSaver Scheme? In this article we cover:
- What is KiwiSaver?
- What is a KiwiSaver scheme?
- What is a default KiwiSaver scheme?
- Should you remain enrolled in a default scheme?
- What to consider when picking a provider
What is KiwiSaver?
KiwiSaver is a voluntary employment-based retirement savings scheme. Employees can choose to contribute 3%, 4%, 6%, 8% or 10% of their before-tax salary toward their KiwiSaver scheme. If an employee is enrolled in KiwiSaver, then the employer must contribute a minimum of an additional 3% of the employee’s salary to KiwiSaver.
If you’re 18 years of age or older, the government will also make an annual contribution towards your fund. The government pays 50c for every dollar of your personal annual KiwiSaver contributions – up to a maximum payment of $521.43 each year.
This means, if you contribute at least $1042.86 a year, you’ll be eligible for the maximum credit. Provided you meet the criteria, KiwiSaver savings can also be used towards a first home deposit.
What is a KiwiSaver scheme?
A KiwiSaver scheme is an investment fund into which your savings are pooled. They are managed to different degrees by scheme providers. You can choose from a range of funds and different providers, but it’s important to take into consideration a number of factors, including:
- A fund’s performance: how much money it makes
- Risk levels: the risk involved with your investments
- Management fees
- Special features, such as ethical, environmental and social investment options
The Financial Markets Authority (FMA) registers and regulates KiwiSaver scheme providers, to ensure providers are working in the best interests of their members. This includes providing sufficient information on fees and how investments are tracking.
As mentioned above, you can choose whatever fund you want. But if you don’t make an active decision, you’ll be provisionally allocated to your employer’s chosen default scheme.
However, if you don’t make a decision and your employer doesn’t have a preferred KiwiSaver scheme, you’ll automatically be allocated to a default scheme by Inland Revenue (IRD).
What is a default KiwiSaver scheme?
KiwiSaver is an opt-out scheme. This means new members (employees) are automatically put into KiwiSaver unless they decide not to join. Upon enrolment, if a fund isn’t actively chosen, Inland Revenue allocates the member into a default scheme.
There are a number of default scheme providers that have been selected by the government based on factors including:
- Investment experience
- Member education
- Organisational capabilities.
New KiwiSaver members are usually evenly allocated between default scheme providers. There are currently nine default providers, but the government has recently announced that from December 2020, that number will be cut to six: BNZ, Booster, BT Funds (Westpac), KiwiWealth, Simplicity and Smartshares (NZX).
You can find a list of all the KiwiSaver scheme providers in New Zealand on the IRD website.
If you are allocated to a default provider’s KiwiSaver scheme, your KiwiSaver contributions will be invested in the scheme’s conservative investment fund option. You can find out who your KiwiSaver scheme provider is by signing up to myIR Secure Online Services, or call the IRD.
However, from July 1, 2021, the default KiwiSaver scheme providers are changing and the default setting is changing from conservative to balanced. This is to ensure than new members don’t miss out on investment returns entirely due to their inaction, by their money languishing in conservative funds.
All KiwiSaver members with their money already in default funds will have their nest eggs moved into balanced funds, too. As of 2020, around 400,000 existing KiwiSaver investors were in this situation.
Should you remain enrolled in a default scheme?
Ideally, no. The choice of provider should be yours, and you should take it into your hands. Being a KiwiSaver member and making regular contributions are for your own long-term benefit. So it’s important to choose a scheme with a fund type that suits your individual circumstances and long-term needs.
It’s key to take a balanced view across a range of factors when considering which KiwiSaver fund best meets your individual circumstances. Particularly, the services available from each provider and the estimated investment returns.
If you stay in a default fund, you could be missing out on the potential for higher returns in a fund that’s invested in more growth assets, such as property and shares.
What to consider when picking a provider
- How much you are paying in fees, against the rate of returns? Generally speaking, you can expect to pay more in fees for funds containing a greater proportion of growth assets. This is because the rate of return is expected to be higher. Also, many are more actively managed, rather than passively following an index. For more on the differences between active and passive funds, check out our story: Active Investing vs Passive: What it Means for your KiwiSaver.
- You are only able to belong to one KiwiSaver scheme, but most providers allow you to split your investment across multiple fund types. This gives you the option to split your funds across risk levels. For example, you might put money you plan to spend in the next few years in a less risky fund, such as a defensive or cash fund, and then allocate some long-term funds to a riskier fund, such as a balanced or growth fund.
- Are you using KiwiSaver to help save for a first home? If you plan to use KiwiSaver for a first home deposit, it’s likely you’ll withdraw funds earlier than if saving for retirement. In this instance, choosing a fund with less risk is a more precautionary approach.
Choosing the right KiwiSaver scheme provider and fund type
Ultimately, the more informed you are as a KiwiSaver investor, the better the decisions you’ll be able to make, which should help you build more funds towards retirement or that all-important first-home deposit.
And this is where Canstar can help. Our KiwiSaver dynamic comparison tables put all the information you need at your fingertips, from average five-year returns to fees.
So if you want to discover if you’re getting true value from your KiwiSaver, start comparing providers today by hitting on the button below.
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