Why you shouldn’t open a KiwiSaver account for your kids

Sam Stubbs, Simplicity’s Managing Director and regular contributor to Stuff.co.nz, recently published an article titled Why you should open a KiwiSaver account for your kids. He says “When a child is born in your family, set up a KiwiSaver account for them as soon as possible, ideally in the first weeks of their life.” Stubbs suggests that with regular contributions, and compounding returns from the KiwiSaver fund, your child could end up with $95,000 by the time they’re 25 – something that could make a huge difference in their ability to afford a house or have a dignified retirement. But is KiwiSaver really a good way to invest for under 18s? In this article we explore the pros and cons of KiwiSaver for kids to help you make an informed decision on what’s the best option for them.

This article covers:
1. What’s so good about KiwiSaver for kids?
2. An alternative to KiwiSaver for kids
3. Are the restrictions of KiwiSaver good or bad?
4. What’s the better option?

1. What’s so good about KiwiSaver for kids?

At first glance Sam Stubbs’ suggestion to open a KiwiSaver account for your kids may seem like a good one. There’s plenty of benefits of investing for your kids through a KiwiSaver fund:

  • Investing for long-term goals – KiwiSaver funds allow you to easily have your money invested in assets like shares and bonds. Over the long-term these should provide better returns than a savings account and beat inflation, allowing your child to reach their financial goals faster or with more money.
  • Compounding returns – Any returns your fund makes are reinvested back into the fund, allowing the investment to make money from its returns as well as the money you initially put in.
  • Diversification – Most KiwiSaver funds have their investments spread across hundreds of assets, across multiple countries and industries. There’s almost no chance such a fund will lose all your money.
  • Tax efficiency – Almost all KiwiSaver funds are structured as Multi-Rate PIEs so assuming you’re investing in your child’s name, the fund will be taxed at your child’s PIR (which will most likely be 10.5%). This is tax efficient compared with NZ listed ETFs which are taxed at a flat rate of 28%.
  • Low minimum investment – You don’t need a lot of money to start investing. Even starting with $1 is fine.
  • Dollar cost averaging – You can drip feed money into your investment over a long period of time, taking advantage of any downturns in the market to pick up units in your fund at a discount.

Stubbs calculates that by investing the price of a cup of coffee per day in an average Balanced KiwiSaver fund, your child could end up with $95,000 by age 25. That’s a massive head start towards buying a first home or for retirement at age 65.

However, there’s a few limitations relating to KiwiSaver that you should be aware of, especially when it comes to kids:

  • There are restrictions on when you can withdraw the money – The two main scenarios where you can withdraw money from KiwiSaver is when buying your first home or when you reach 65. Other instances you can get your money out include permanent emigration, financial hardship, serious illness, or death. That’s it. You can’t get the money out to pay for education, buy a new computer, or to travel.
  • No employer or government government contributions – Under 18s aren’t eligible to receive KiwiSaver employer or government contributions. That is unless an employer decides to voluntarily provide those KiwiSaver contributions.
  • The $1,000 kickstart doesn’t exist – You used to be able to get a $1,000 kickstart contribution from the government when you opened a KiwiSaver account, but this hasn’t been available since 2015.

Further Reading:
KiwiSaver 101 – How does KiwiSaver fit into your investment portfolio?

2. An alternative to KiwiSaver for kids

If you want to invest for your kids, there is no rule requiring you to do so through a KiwiSaver fund. It’s definitely possible to invest through a non-kiwisaver fund, which are offered by most investment providers (alongside their KiwiSaver offerings). For example the KiwiSaver funds offered by Simplicity, Kernel, InvestNow, SuperLife, and Milford are also available as non-KiwiSaver funds (In fact some of their funds are available only in non-KiwiSaver form!). Note these products are called a variety of names by different providers such as “Invest”, “Investment funds”, and “Managed funds”, but we’ll stick with the name “non-KiwiSaver fund” throughout this article.

These non-KiwiSaver funds offer largely the same benefits as KiwiSaver funds, with similar (if not identical) fees:

  • Investing for long-term goals – A non-KiwiSaver fund will typically have the same or similar underlying investments as its KiwiSaver equivalent, so should deliver the same or similar performance, helping you reach your long-term financial goals. For example, the Simplicity Balanced Fund has identical underlying investments and will deliver identical returns regardless of whether you invest in it inside or outside of KiwiSaver.
  • Compounding returns – Compounding returns works the same regardless of whether you invest in a non-KiwiSaver fund or KiwiSaver fund. Except you may need to ensure than any distributions you get are automatically reinvested (as some non-KiwiSaver funds give you the option to receive distributions as cash).
  • Diversification – Given a non-KiwiSaver fund will typically have the same or similar underlying investments as its KiwiSaver equivalent, the level of diversification should be the same.
  • Tax efficiency – Like KiwiSaver funds, most NZ domiciled non-KiwiSaver funds are also Multi-Rate PIEs. There is no tax difference in these cases.
  • Low minimum investment – In some cases the minimum investment is higher for non-KiwiSaver funds (e.g. Simplicity has a minimum investment of $1,000). But there’s still plenty of providers with low minimums (e.g. Kernel who allow you to invest with as little as $1 per fund).
  • Dollar cost averaging – You can also drip feed your money into non-KiwiSaver funds. Some fund managers let you set up auto-invest or regular investment plans to put your investment contributions on auto-pilot.

However, the key difference between KiwiSaver and non-KiwiSaver funds is that non-KiwiSaver funds have no restrictions on when you can withdraw the money. You can sell your units in a non-KiwiSaver at anytime and for any reason (yes, you can still withdraw non-KiwiSaver money for a house deposit). All it takes is for you to submit a sell order or withdrawal request to the fund manager, and your investments will be sold and the money returned to your bank account within a few business days.

3. Are the restrictions of KiwiSaver good or bad?

With the key difference between KiwiSaver and non-KiwiSaver funds being the restrictions on when you can withdraw your money, let’s look at whether these restrictions are a good or bad thing.

Good points

Prevents misuse of money

Some parents may be concerned that their kids will misuse the money invested for them, by blowing it on things that don’t contribute to their financial success. The restrictions of KiwiSaver can prevent this from happening. Housing and retirement generally viewed as worthwhile or important things to save or invest towards.


Bad points

The reasons for withdrawal aren’t flexible

The money in KiwiSaver can’t be withdrawn for education, travel, to start a business, buy a car, or for your child to to pursue their hobbies. So generally the first opportunity your child will have to withdraw it is when buying their first home. But not every child will aspire to be a homeowner (and that’s if they can afford it in the first place). Owning a home isn’t a guaranteed way to build wealth, nor is it the only way to become rich as people are slowly realising that investing in shares and funds are genuine alternatives to growing your wealth. And while everyone needs a place to live, there’s nothing wrong with renting. If your child doesn’t buy a house, their next opportunity to withdraw the money is at age 65, and there’s no opportunity to use the money to retire early.

Further Reading:
Buying a house – an overrated way to build wealth?

The rules can change

The money you invest into a KiwiSaver fund is not held by the government, but the government still controls the rules around when you can access the money. And there’s no guarantee they’ll retain the same criteria around when/if you can withdraw KiwiSaver for your first home. They could tighten the criteria, for example, by only allowing you to withdraw the money to buy a house within a certain price range, or if your income is under a certain amount. Or perhaps a future government could disallow first home withdrawals altogether.

No benefits to compensate for the lack of flexibility

In the financial world, a lack of flexibility is usually compensated with some sort of financial benefit. For example:

  • Term deposits – These lock your money in for a fixed period of time, but usually offer higher interest rates than an on-call savings account.
  • Fixed term mortgages – Fixed term mortgages don’t have extra features (like being able to pay off your loan at anytime, offset accounts, and revolving credit), but come with better rates than a more flexible floating rate home loan.
  • KiwiSaver for adults – Those 18 or over are eligible for employer and government contributions. This generally makes the restrictions of KiwiSaver worth it.

However, KiwiSaver offers no financial benefits for kids to compensate for the fact that their money is locked up. There is no $1,000 government kickstart. There are no employer or government contributions for under 18s.

4. What’s the better option?

In our opinion the advantages of investing in KiwiSaver for kids seem to be outweighed by the disadvantages. KiwiSaver is just an ordinary investment fund that comes with extra restrictions, so why would you impose those restrictions on yourself when you get no financial benefits in return?

Therefore we’re fans of investing outside of KiwiSaver. Not in a savings account, but in a non-KiwiSaver fund (e.g. instead of investing in Kernel’s High Growth KiwiSaver fund, you could invest in Kernel’s High Growth non-KiwiSaver fund). You could even apply the same idea for adults – Invest in KiwiSaver only the amount needed to get the maximum employer and government contributions, then invest any extra into a non-KiwiSaver fund for the flexibility.

But that’s just our personal way of thinking. The best investment for child comes down to your personal preference and family situation. It’s understandable if you want to lock away some money for a first home or retirement. Plenty of people are in this boat, with a poll we ran with our Instagram followers showing that about two-thirds of respondents think KiwiSaver for kids is a good idea:

Social media poll results
We asked our followers on Instagram “Do you think investing in KiwiSaver for kids is a good idea?” and got 219 responses:
– Yes! 137 respondents (63%)
 No… 20 respondents (9%)
I’m on the fence 46 respondents (21%)
– I have no idea 16 respondents (7%)


It doesn’t have to be an either-or selection

Remember that you don’t have to decide between investing in either KiwiSaver or non-KiwiSaver. It’s possible to invest in both. All providers allow you to simultaneously have a KiwiSaver and non-KiwiSaver accounts with them (or you could split these investments across different providers). Then for every dollar you invest, you could put $0.50 in KiwiSaver and $0.50 outside of KiwiSaver. And no, your returns won’t compound more slowly if you split your money across multiple funds.

Having both is especially useful when your child turns 18, when they finally qualify for the financial benefits of KiwiSaver. For example, when they become eligible they could contribute to a KiwiSaver account to collect the employer and government contributions, AND a non-KiwiSaver to invest without the restrictions of KiwiSaver.

Further Reading:
How to invest for kids in New Zealand

Conclusion

Sam Stubbs thinks that all families should open a KiwiSaver account for their kids once they’re born. This isn’t necessarily bad suggestion, but we don’t think it’s a good one either. There is more than one way to invest for your child’s future, and KiwiSaver might not be the best one for your family. Non-KiwiSaver funds offer the same benefits of a KiwiSaver fund, just without the restrictions on when you can withdraw the money. You won’t miss out on employer or government contributions, as kids don’t qualify for these anyway.

While you don’t have to choose between one or the other (as you can invest in both), the choice between KiwiSaver and non-KiwiSaver really comes down to whether you want to lock up the money (possibly until age 65) or keep it free to withdraw at anytime.

Further Reading:
Should you quit KiwiSaver? Our response to YouTube KiwiSaver advice
12 KiwiSaver myths and misconceptions busted

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Disclaimer

The content of this article is based on Money King NZ’s opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.


Comments

  1. Great article, I love your content, but I’m still going to respectfully disagree with you on KiwiSaver for kids. Or, try to be more helpful, and add my own thoughts. Having met so many adults who are failing to save enough for retirement, it seemed logical to me to give my daughter, who is now 15, a head start. So, at the age of one, we signed her up. She got the $1,000 before the government scrapped it. And her grandparents added another $1,000. Ever since we have contributed just $40 a month. More recently, her employer has begun to contribute, too (in her case, ALL of her employers have added to her fund). The current balance is almost $17,000. Alongside this, we are currently doing what many people tell me they wish their parents had done for them: we are actively teaching our daughter how money works. Small lessons, often repeated. We are teaching her to budget, save for short-term things in her bank account (new phone), save for long-term things using ETFs (university, travel or a home) and for her retirement using KiwiSaver. She does it all at the same time. If she only ever contributes the minimum from each paycheque into her retirement account, when she accesses it one day, that tiny amount she forfeited for her future self throughout her working life is going to guarantee her an incredible retirement that she has saved for with ease. I meet too many who don’t make setting aside a portion of their current income for future use a habit, and they are left playing catchup in their later years. Habits are so important when it comes to good money management. And they regret not starting sooner. I think we need to stop seeing retirement funds as something we can ‘use elsewhere’ and stop seeing it as just a mathematical exercise because life can often get in the way of math. Instead, take a look at life: the majority of us will all retire one day, and it seems prudent and logical to plan for it early. Ruth, The Happy Saver.

    1. Hi Ruth, we did think about your blog post on this very topic as we were writing this article! We do acknowledge that KiwiSaver can add some additional value – like locking in the money to prevent blowing it or prevent going off course with your investing habits, and attaching some purpose (e.g. retirement) to the habit. And it’s great you’re doing both by investing in non-KiwiSaver funds for other goals like university.

      One problem with KiwiSaver for retirement is that it aligns with the traditional view of retirement (i.e. stop work at age 65). As someone who wants to retire well before then, KiwiSaver isn’t useful in supporting that goal. We’ll still benefit from being able to withdraw a lump sum from our KiwiSavers once we reach 65 (and will likely need this money to keep supporting our retirement for many years beyond age 65), but we’d prefer the flexibility of being able to use that money a little earlier in life. Perhaps that may further explain our bias towards investing outside of KiwiSaver.

  2. KiwiSaver for kids was only worthwhile when the $1000 kickstart was available.

    The NSW government is considering a future fund for all children where annual payments ($400) are made up to the age of 18. If matched by the parents these kids could have a lump sum up to 50k by the age of 18.

    Another idea I would like to see further discussion on is a once off payment at birth. If the government gave each newborn $6k, put into a growth fund it would greatly reduce the need for KiwiSaver and the pension due to compounding and time in the market.

    1. Yes, we would be supportive of these ideas of having a government contribution for kids. Perhaps in conjunction with adding the ability to use KiwiSaver to pay for tertiary education or student loan debt. A lump sum payment/kickstart would be a good incentive too. These would certainly make KiwiSaver for kids worthwhile.

  3. Our son has just turned 3, we have been putting money aside for him since he was born and since we live overseas and only get home once a year, grandparents, aunts and uncles are happy to make small deposits into his serious saver account for birthdays and Christmas etc. Sometimes he is lucky and gets a present and cash if we are home when birthdays or Christmas occurs. My wife and I are presently putting $100 a month into his account and he has just on $4000. We had been seriously thinking about opening a Kiwi Saver account for our son, but reading your article has given us something to think about and we are now looking into setting up just a regular non Kiwi Saver investment for him. When he gets closer to 18, we will suggest that he moves a significant portion of his non KS into a normal KS fund so that he can get the benefits associated with that but retain the non KS account for his short, medium term goals. Seriously this was a great article. Often as parents we do what we think is the best but are hampered by our own financial bias .

    1. Your son sounds like a lucky guy! We will hopefully do the same for our future kids – start a non-KS investment when they’re born, then open a KS when they turn 18 to get the benefits. That’s assuming the KS rules stay the same by that time!

  4. 100% agree with this and it’s nice to see someone writing about what I think are better alternatives so thank you.

  5. With kiwisaver non funds, can the parents put a restriction on what age the child can get access to the money and how much even?

    1. Generally not. In most cases under 18s can’t buy/sell funds, so need a parent/guardian attached to the account to invest on their behalf. Other than that there’s not much in terms of restrictions, but you would have to check with each individual fund manager/platform for their specific rules (e.g. Sharesies allows you to set an age between 18 and 25 for a child to take control of the account).

  6. Why put your money into your children’s Kiwisaver account for it to be included in matrimonial property and halved and then maybe halved again? Alternatively you could send your money to work the best you can and then lend it to your children to purchase their first home.

    1. Interesting point there about KiwiSaver money potentially ending up as relationship property. But the same could also happen to money invested in non-KiwiSaver funds. Yes, lending out to your kids may be a solution, but the problem with investing the money under your own name is potentially having to pay tax at a higher rate. A contracting out agreement/prenup is another potential solution.

  7. Interesting article. I was wondering- does the govt contribution of up to $528 approx annually – if you meet the required payment -is that available for people under 18? Or for the kids?

  8. I am very interested in this non kiwisaver fund for my grandchildren can you advise where can I find such products and services?

    1. Hi, most KiwiSaver providers also offer non-KiwiSaver funds e.g. ANZ, ASB, BNZ, Westpac, Fisher Funds, Milford, Simplicity, Kernel, InvestNow

  9. Kia ora,
    In terms of investing in non-Kiwisaver funds on a kid’s behalf, is it better to have these accounts in your own name/s and not the child’s name? Therefore you can mitigate the risk of them having access to ‘their money’ from 18 and doing what they please with it.

    1. That can solve the access issue, but usually has a tax disadvantage. Most kids would fall into the 10.5% PIR bracket as they have no other income, while adults are likely in a higher tax bracket due to having other income from work.

  10. Good article but it seems that you might have “forgotten” to mention one thing: fees. Generally speaking, the fees for KiwiSaver funds are much lower than non-KiwiSaver funds.

    1. We’d generally disagree with that. Some fund managers do indeed charge lower fees for KiwiSaver (e.g. Kernel, ANZ) but usually this isn’t a significant difference. Many fund managers charge the same fees (e.g. Simplicity, InvestNow). Others charge higher fees for KiwiSaver (e.g. SuperLife). Overall there isn’t enough of a significant difference either way (unless we’ve totally missed some other example) to call it out as a factor in deciding between KiwiSaver vs non-KiwiSaver.

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