New Zealand is almost certainly headed into a recession as a result of Covid-19 and many Kiwi households are facing financial struggles. It is natural that many New Zealanders will be eyeing what is likely to be their biggest financial nest egg, KiwiSaver.
Data from financial research organisation Canstar suggests that the vast majority of New Zealanders - nearly 70 percent - do not have savings outside of KiwiSaver. And of those who do, less than half have easily accessible funds in the form of savings or term deposits. So we know Kiwis have limited buffers against financial stress.
KiwiSaver is designed for retirement but there has always been an option to withdraw under hardship criteria. Despite the extreme difficulty of accessing funds this way, the latest KiwiSaver annual report showed such withdrawals were up 7 percent in 2019 from the year before, and reached $108 million.
Wage subsidies and support measures have so far cushioned the financial impact of Covid-19. The longer term impact on the economy and New Zealanders is yet to be felt. As such, we would expect the number of people seeking hardship withdrawals from KiwiSaver to rise as the pain sets in.
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But is seeking a hardship withdrawal the right option?
It’s important to note that to do so, or even to explore it as an option, is a very personal decision. Kiwis are facing extraordinary circumstances and hardship funds are part of New Zealand’s financial support network.
But even while under these types of strains, it is important to consider such decisions carefully.
All KiwiSaver providers will put withdrawal requests through the wringer, and any agreement to release funds may only be granted in cases where members require emergency funds to cover, for example, medical or funeral costs.
Canstar general manager Jose George says Kiwis should consider the long-term future of their KiwiSaver. Photo / Supplied
The pandemic has upended the value of many investments, and most KiwiSaver balances have been impacted. If your KiwiSaver has dropped in value, a withdrawal now will crystallise losses. But perhaps more importantly, making a withdrawal now will mean you will not benefit from what the scheme is intended to do - keep you afloat in your retirement.
Canstar analysed the possible loss in benefits if withdrawals are made from KiwiSaver across different investment profiles. This analysis is made on the basis of past performance, and we note this is not an indicator of future outcomes.
We analysed the outcome for someone aged 35, on a median income ($52,832), with an average KiwiSaver balance ($19,500), contributing the minimum 3 percent contribution and benefiting from the 3 percent employer contribution. In this example, we used the five-year average net returns for the different fund profiles in the scheme, and considered the withdrawal of $10,000.
If the funds were invested in a conservative type fund, Canstar’s calculations showed the potential loss would be just over $30,000, or around 14 percent of the $208,000 they could have saved by age 65.
The figure reached $47,500 in a balanced fund, or nearly 17 percent of a possible $283,000. And if the savings were invested in a growth fund, the figures reached more than $70,000, or 19 percent of a possible $376,000.
Of course, if you withdraw more the long-term losses are higher. Withdrawing $15,000 from a growth fund for example, could mean missing out on over $100,000 over the 30-year timeframe.
It’s a painful reality check, but it’s one those looking to take this route should consider. We are in incredibly difficult times, and everyone has to make hard personal decisions. But before you do so, consider all other options available. It may be that you could restructure your mortgage, benefit from government support, use short-term, low-rate credit card funds, or even stop contributions to your KiwiSaver for a time. Always consider the long-term future you want to protect.
- Jose George is general manager of Canstar.
