Economy

Keep hands out of KiwiSaver, if you can

The number of KiwiSaver financial hardship withdrawals are starting to tick up, as people begin to feel the effects of Covid-19. As Laura Walters writes, it's just the beginning

Experts are urging Kiwis to exhaust all other avenues before dipping into their KiwiSaver funds to deal with financial hardship brought on by Covid-19.

The advice comes as the number of financial hardship withdrawal applications, and the amounts being withdrawn, begin to rise as Kiwis feel the effects of the pandemic.

But a spokesman from the country’s largest KiwiSaver provider, ANZ, warns the worst is yet to come.

At this stage, many Kiwis are getting by thanks to the Government’s wage subsidy schemes. But those subsidies will end in the coming months, and more families will feel the squeeze.

IRD figures show 2,120 KiwiSaver members withdrew their savings in July due to financial hardship, up from 1710 in July 2019.

The number of people accessing their KiwiSaver funds due to financial hardship has been steadily rising over the past 10 years. In the the financial year to June, 17,000 members had withdrawn their savings due to financial hardship, up from 2800 in the 2010 financial year, which was when the data series began.

There has also been an increase in the amounts being paid out to struggling Kiwis.

This is likely influenced by the industry guidance to pay out 26 weeks’ worth of living expenses, rather than 13. This guidance was issued as a result of the impacts of the virus.

In July, a total of $15 million was withdrawn due to financial hardship, compared to $9.7m in July 2019. That’s a 55 percent increase in the amount withdrawn in the month of July, year-on-year.

And in the past financial year, $105m has been withdrawn by people eligible under the financial hardship criteria, compared to $8m withdrawn in the 2010 financial year.

While these figures show the number of people dipping into their KiwiSaver is on the rise, ANZ said the biggest jump in hardship KiwiSaver withdrawal applications was yet to be seen.

At this stage, ANZ is seeing withdrawal applications similar to pre-Covid levels, paying out approximately 120-150 hardship withdrawals a week.

But the IRD data, which is collected from all of the country’s KiwiSaver fund providers, does show an uptick compared to previous years.

ANZ said there was often a lag in accessing funds through KiwiSaver hardship as the bar for being able to withdraw is set very high by the Government. 

Members who had experienced job losses and other impacts of Covid-19 need to have exhausted all other reasonable sources of funds before they can apply.

The ANZ spokesperson said providers were expecting an increase in hardship withdrawals in the next few months as the wage subsidies end, and the full financial impacts of Covid-19 begin to be felt. 

The Government’s original wage subsidy scheme closed in June, but was later extended by two months, until September 1. Then the Government introduced a separate scheme, the Resurgence Wage Subsidy, after new cases emerged in Auckland, triggering the return to level 3 restrictions.

Currently, almost 338,000 jobs are being supported by the various wage subsidy schemes, and the Government expects the wage subsidy extension and the new wage subsidy to support 930,000 jobs.

All up, the Government has paid out more than $13.4 billion dollars in wage subsidies, to support more than 1.7 million jobs.

But over time, as the subsidy schemes taper off, and businesses struggle to keep employees and stay open, more people are expected to look to their KiwiSaver funds for a lifeline.

“We encourage members to explore all options available before requesting access to their retirement savings, including utilising any government or bank support first,” ANZ said.

“While KiwiSaver can help in times of extreme hardship, its main purpose is to help members achieve a comfortable retirement – as such, any early withdrawals will have a negative impact on members’ retirements.”

For example, withdrawing $20,000 at age 30 would result in a drop in balance at age 65 of $37,000. This is adjusted for inflation, so the $37,000 is the real buying power of those savings in the future.

Rupert Carlyon, founder and managing director of KiwiSaver provider Kōura, agreed the significant financial hardship claim should only be used as a last resort.

“I do know that there will be plenty of Kiwis out there facing tough times and retirement planning shouldn’t come at the cost of one's survival.”

But withdrawing funds early meant less money for retirement, and a lower quality of life, he said.

The advice for Kiwis to try and leave their KiwiSaver alone comes in the wake of a controversial election policy proposal from the National Party, which encouraged those with an idea for a new business to dip into their KiwiSaver to help fund their start-up.

“Right now, Kiwis do not truly understand what KiwiSaver is and expect far too much from it."

At the end of July, National Party leader Judith Collins announced National’s BusinessStart policy, which would allow those who had lost their jobs during the Covid-19 downturn to withdraw up to $20,000 from their KiwiSaver accounts to set up new businesses.

But the National Party scheme was labelled a “terrible idea” by KiwiSaver providers and financial advisors.

At the time, Kōura’s Carlyon said KiwiSaver was not a “rainy day fund”.

“Right now, Kiwis do not truly understand what KiwiSaver is and expect far too much from it,” he said.

“An investment with such a high probability of failure is not something that people should be banking a significant chunk of their retirement savings on.  

“We hear far too many stories of people losing their retirement savings by doing exactly what Judith Collins is encouraging, diverting their retirement savings from a well diversified investment fund into a highly risky venture.”

Meanwhile, a financial advisor who specialises in helping people plan their financial future by maximising their KiwiSaver said he was “vehemently opposed” to the policy.

National Capital founder and director Clive Fernandes said taking KiwiSaver funds to start a small business during an economic recession was a “terrible idea”. 

The primary reason for small businesses failing was undercapitalisation, and encouraging an unemployed person to start a business using $20,000 was a “recipe for disaster”.

“We already have a problem, that even with KiwiSaver, a large proportion of Kiwis will not have enough money to retire on. 

“Encouraging them to withdraw even more from their KiwiSaver accounts will only exacerbate the problem,” Fernandes said.

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