We know how important it is to provide a high quality, low-cost KiwiSaver scheme because of the huge impact this has on our customers’ savings. Even though we’re already one of the lowest cost options available in New Zealand, we’re further reducing the fees we charge in the BNZ KiwiSaver Scheme. We want our member’s money to work hard, so with lower fees, more of their money will go to towards growing their investment.
But what do lower fees mean in dollar value?
It can be tricky to understand how the fees you’re charged have an impact on your investment value over the full course of your investment, but it does really add up. I’ve used our modelling tools to help demonstrate the difference that lower fees can make to a KiwiSaver account. To help keep the calculation easy to explain, I’ve made some assumptions:
- A 30 year old KiwiSaver member with an annual salary of $60,000
- Employee contributions of 3% each year with compulsory employer contributions of 3% each year
- The member receives maximum Government contributions each year
- Contributions are invested into a growth fund
- A starting balance of $20,000
- Tax calculated at 28% PIR
- No savings suspensions or withdrawals made over 35 years
Full details of the assumptions used for this example are set out at the bottom of this article.
In a fund charging fees of 1.1% a year, this person would end up with an estimated balance at age 65 of $508,000. Using our fees of 0.45% a year, we estimate their balance would reach $560,000 over the same time frame.
This means the difference in fees alone leads to more than $50,000 extra in their KiwiSaver account at retirement.
So why should you care about fees?
Here are a few things to keep in mind:
Fees have a big impact on investment returns
What look like relatively small differences in the fees different providers charge now can make a huge difference later on. That’s because the money you are saving in fees gets invested instead and it can then generate returns over the lifetime of your investment.
Fees can be confusing
Many investment providers charge a lot of different fees making it hard to compare options. Our approach to fees is simple. We only charge one low percentage-based fee. We don’t charge member fees (sometimes called administration fees) or performance fees.
Aligning fees gives you more flexibility
We’ve decided to make the fees for the BNZ KiwiSaver Scheme and our non-KiwiSaver managed fund option YouWealth the same across most fund options. This means that in most cases you can put money into a YouWealth fund at the same low fees as the BNZ KiwiSaver Scheme option, without having to lock your money away until retirement. It also means that you can pick the fund that matches your investment goals and risk profile without being deterred by potentially higher fees in some funds.
You should also be aware that tax leakage can have an impact on your returns. Some providers have low fees, but they are also “leaking” money because they haven’t been set up in the most tax efficient way. This is pretty complex but it’s important to note that BNZ holds all its KiwiSaver and YouWealth investment assets in New Zealand so avoids this tax leakage that affects many other low fee providers.
It’s easy to forget about investment fees – after all, they’re built into the unit price of your investment, so get paid without you even seeing the amount. But they’re one of the most important factors in determining the success of your investment approach. That’s why we have such a relentless focus on delivering low cost, high-quality options for our customers.
Peter has nearly 20 years’ experience in financial services across Australia, New Zealand and Asia. He has led Bank of New Zealand’s Wealth business since August 2018.
BNZ KiwiSaver Scheme
This year, the BNZ KiwiSaver Scheme is one of three sharing top honours in our Outstanding Value | KiwiSaver Award. This award is concerned only with the returns that KiwiSaver funds provide to their customers.
When researching this award, we compare the cost, features and performance of KiwiSaver funds (over a minimum of five years) across balanced, conservative and growth profiles. Then, we acknowledge the scheme or schemes that demonstrate outstanding value across all three fund profiles with our top award. For more information about the BNZ’s win, click the button below.
Important information about assumptions used for fee calculations:
- The calculation here is for illustration only to show the impact of lower fees on account balance at retirement and is based on several assumptions and estimates. These financial results are therefore unlikely to reflect an actual balance at retirement. For example, actual investment returns are likely to move up and down due to investment and other risks. Returns may be negative over some time periods.
- The growth fund used for the purposes of this example is assumed to have an investment return of 5.1% each year. The investment returns used to calculate this reflect our estimates of how investment markets may perform over the long term.The actual investment returns for the BNZ KiwiSaver Scheme funds are not known in advance and will be different to those used in this calculation.
- In addition to the assumptions outlined above and in the article, the following assumptions apply:
- We’ve calculated a deduction for Employer’s Superannuation Contribution Tax (ESCT) using the rate applicable to the annual income. We assume the income bands for ESCT will adjust each year in line with salary inflation, so this ESCT Rate is applied to all Employer Contributions.
- To allow for salary inflation, salary is assumed to increase by 3% each year.
- Employee and employer contributions continue at the given rate until age 65.
- Government Contribution rules are assumed to continue in their current form until age 65.
- All regular cash flows (such as contributions into KiwiSaver) are annualised and occur half way through the year.
- Assumed rate of inflation is 2% per annum.
- Buy Sell spreads are not applied to the calculation.