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KiwiSaver Confusion

Dom Bish — Sat, 12 Feb 2022 00:26:26 +0000

https://bolsterriskmanagement.com/

KiwiSaver Confusion

We have all heard about KiwiSaver and despite having over 3 million members it would appear that confusion and lack of understanding of how it works is the most common talking point.

By the end of the March 2021 financial year, New Zealanders had invested $81.6 billion dollars into KiwiSaver, with $26,410 being the average amount invested. Not bad going for a scheme which started in 2007. However, given such a large amount of money has been invested into KiwiSaver it is hard to believe that there is still widespread confusion.

Key Ideas:

What is KiwiSaver?
What is the purpose of KiwiSaver?
When can or should you get the money?
Choosing the right scheme for you

Are you paying into KiwiSaver but are uncertain about how it actually works? Do you think you are in the right scheme? Where to you go to seek advice? Read on to find answers to some of these questions.

What is KiwiSaver?

KiwiSaver is an easy, affordable and voluntary savings scheme which was set up by the government in July 2007 to help New Zealanders save for their retirement years.

As employees you can choose to contribute 3%, 4%, 6%, 8% or 10% of your gross (before tax) wage or salary to a KiwiSaver scheme. Your employer in turn contributes with close to 3% of your gross salary.

Your contributions are invested on your behalf by a KiwiSaver provider of your choice. If you don’t choose a provider, Inland Revenue will assign you a default KiwiSaver fund.

A KiwiSaver scheme grows a number ways, automatic contributions, employer contributions, the investment returns from contributions being invested for you by your KiwiSaver provider, government contributions (even if you are not an employee, this can be as much as $521 each year) and any additional money you choose to put in. You can make voluntary contributions, lump sums or regular automatic payments at any time either directly to your KiwiSaver provider or through Inland Revenue.

Most employees contribute the minimum 3% and it is considered by many to be compulsory saving. With the money coming out each pay cycle it has become a way of life and it is not surprising that around a quarter of KiwiSaver members do not regularly check their account balance or know how much their KiwiSaver is worth.

What is the purpose of KiwiSaver?

KiwiSaver schemes have become increasingly popular as most of us recognise that when it comes time to retire the government pension and our own personal assets are not going to be enough for us to live comfortably. This realisation has been reinforced with the results of a recent survey carried out by the Financial Services Council which found that the majority of New Zealand adults, around 70%, think they will need to work past the retirement age in order to maintain their current lifestyle.

In addition, 65% of respondents, representing 2.5 million Kiwis, are worried they aren’t on track to have enough money or will be unable to afford where they want to live in retirement. This is scary, given people work hard for the majority of their lives for the reassurance that when they retire they will have the money to do what they want.

When can or should you get the money?

After you reach 65 years of age you are eligible to take all or some of your contributions out of your KiwiSaver scheme.

Just because you can take out it when you reach 65 does not mean that you should. You have options including leaving your money invested in as long as you like, rebalancing to better meet your needs, making regular withdrawals (note there could be a minimum amount and some fees may apply) or pulling it all out to either spend or invest elsewhere. If you choose to reinvest elsewhere look around as a KiwiSaver return of 10% is a lot better than putting into a bank which may offer only a 1% return.

At 65 you may still be working and if so you can keep your KiwiSaver scheme open and growing. At this point your employer can choose to continue to contribute, although they don’t have to as once you reach 65 you are then eligible for New Zealand Superannuation. The government will also stop its contributions to your KiwiSaver.

You can use KiwiSaver for buying your first home through a KiwiSaver HomeStart grant and home purchase withdrawal.

Early withdrawal from your KiwiSaver is an option under The KiwiSaver Act 2006 if you are suffering financial hardship or a serious illness but is not that easy to do as you will need to meet required policy criteria.

Before you make any decisions, talk to a financial adviser about your financial goals so you can work out the best course of action.

Choosing the right scheme for you

KiwiSaver providers offer a range of investment fund options to suit your needs, for example if you are just stating working or nearing retirement. These funds have different amounts of potential risk and return.

You can choose your fund from a KiwiSaver scheme provider and can switch at any time. You don’t have to stay with your employer’s chosen provider, or a default provider.

Things to consider when deciding on a scheme:

Your Risk profile

Each KiwiSaver scheme invests your money differently. If you choose a low-risk fund, most of your investments will go toward low-return, less-risky options such as bank deposits and fixed-interest investments such as bonds.

If you choose a very aggressive and high-risk fund type, most of your investment will go toward shares. Some of these funds may offer other investment vehicles such as futures and options.

For longer term savers, for example those just starting out in the workforce, you will have the time to take more risk, allow the market to go up and down (and back up again). Economic cycles tend to be round 7-10 years. If you have 3-4 decades before you retire, you will go through these ups and downs before you need to withdraw your KiwiSaver.

The level of risk you choose should be based on factors relevant to your situation.

The Fund type – this is similar to risk level.

The Te Ara Ahunga Ora Retirement Commission split the funds types into five categories; Cash, Defensive Conservative, Balanced, Growth and Aggressive.

Each one is slightly more ‘risky’ than the previous. High risk, means the potential for greater reward (remember nothing is guaranteed). An expert will advise you on the best fund for you.

In simple terms, higher risk funds are more likely to give you a higher return (grow your KiwiSaver faster), but there is a chance that they will also decline during those economic cycles. The low risk funds will grow your retirement nest-egg the slowest, however, their ‘volatility’ during the cycle should be less dramatic.

Active versus Passive

There are pros and cons for both types of approaches and an expert will guide you through this.

In recent times the passive approach has done well, because the market over the last 10+ years has gone up, which means every fund has done well. The downside of passive funds is there is not any downside mitigation, or protection from market losses.

The active approach is more selective on where the investments are made, they can move faster and be more nimble to market changes. There is also flexibility to deploy other tactics to minimise any losses, for instance, some providers will use options to minimise or in some cases, gain from market losses.

First Home buyer?

Are you planning to use KiwiSaver for your first home grant? If so talk to an expert.

The Fees

Not all fees are the same and when deciding on the KiwiSaver scheme best suited for you, the providers’ fee structures needs to be considered.

There is a big drive from some of the better known providers to lower fees and promote it as being the key to a good KiwiSaver scheme. However, if you take a more rational approach higher fees are okay if you are getting better performance from your fund manager.

Fees should be charged based on the actual service provided and giving customers value for money.

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Get advice

Your retirement nest egg is important, especially after working all those years to build it up.

A report in 2016 highlighted that only in 1 in 1,000 people sought advice on their KiwiSaver scheme, this is an alarming statistic given the amount of money invested.

It is important to seek financial advice to guide you on what is right for you and your circumstances. After all, you wouldn’t build your own house if you were not a builder, pull out your own teeth if you were not a dentist or fix the brakes on your car if you were not a mechanic. Why leave your financial future to chance?

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Dominic started Bolster Risk Management to help people along their personal finance journey.
He believes that personal insurance is the bedrock to financial security and wealth creation. You have to protect your greatest asset, your ability to earn an income.
Underpinning this is a philosophy that says Your Money Matters.

The post KiwiSaver Confusion first appeared on Bolster Risk Management - Simplifying financial risk, insurance and investments for you..

The Basics of Personal Insurance

Dom Bish — Thu, 14 Oct 2021 23:37:22 +0000
https://bolsterriskmanagement.com/

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Who is this article for?
This information article is aimed at helping anyone gain a basic understanding of insurance. Bolster Risk Management deals in ‘personal insurance’.
This means anything that effects the body (such as health, accident and death).
There are other types of insurance, such as boat, car and house insurance.
These are typically known, rather antiquatedly, as ‘fire and general’ cover. This booklet does not deal with these.
Note: this is not a policy document. It’s a basic guide to some of the more relatable insurance issues, the ones we discuss with clients time and again. Always seek advice from a registered adviser if you have any insurance questions.

What can you expect to read?
Common questions and concerns from people like you. We speak to a lot of people – we love to, it’s our job – and the people we speak with all tend to have similar questions and concerns.
These include:

Why do I need insurance?
What will it cost me?
What types are there?
What if the insurer fails?
What if they don’t pay claims!

Why do I need a broker?
What does a broker do?
Who pays the adviser?
Why is it so complicated?

What exactly is insurance?
History
Insurance has been around since the Babylonian traders. Life insurance as a category was not formalised until the first contracts written in the early 1700s. This gave rise to the use of the mortality rate, a measure of the number and causes of deaths. This quickly led to the use of ‘actuaries’, those who look at all possible risks and quantify these risks into possible liabilities.
So, what is it?
Insurance is simply the transfer of risk, from one person (or entity) to another. It is a means of protection from financial loss, or more formerly, risk management. Essentially, you pay a premium to someone else, an organization, usually, so that if a risk event occurs, you are financially covered.
Ok… so, show me how it works…?
A simple way to describe what it is, is to describe what might happen if you had it.
Let’s say that Leon has a family and a mortgage owing $500,000 to the bank. Unfortunately, Leon dies, leaving his wife and family with that debt.
The simple risk = $500,000 to the bank. But what does that mean in practical terms? The bank could foreclose or repossess the house if the family is unable to pay the mortgage repayments.
Therefore, the actual risk = $500,000 and the loss of the family home, a slightly different and, let’s face it, less attractive picture.
The solution: Pay someone else a small amount (a premium to the insurance company), so that in the event of death, the insurance company will give Leon’s wife $500,000. This means the risk has been transferred from Leon to the insurance company for the price of the premium.
Product Types
Broadly, there are five types of personal insurance: Life, Trauma, Income Replacement, Total and Permanent Disability (TPD), and Health and Medical insurance.

Life insurance

Death cover (a lump sum benefit). Some insurers will pay on terminal illness (if you are likely to die within 12 months).

Trauma insurance

Serious illness or accident (lump sum cover). Sometimes known as critical cover (although this is occasionally a ‘skinny’ version of a full trauma product).

Income Replacement: Income Protection

Replaces part of your income because you become too sick or injured to work (monthly paying benefit). This type of benefit is often offset by other income (such as ACC payments).

Income Replacement: Mortgage Protection

Pays most or all your mortgage repayments on a monthly basis because you are too sick or injured to work. This can also be used to replace a portion of your gross income, (can be up to 45%) to help pay rent and other expenses.

Total and Permanent Disability

Never able to work again? This may mean that you cannot work in your current occupation, or you may never work again in any meaningful capacity. It pays you a lump sum benefit.

Health and Medical

For elective treatment (not acute), i.e. it’s for surgery, not a car accident. If you need a shoulder reconstruction or treatment for bowel cancer, you may be able to claim (policy conditions may apply).

What is BMI and how might it effect your personal insurance?
Body Mass Index is a simple tool that helps insurance providers. The index helps the insurance underwriters to assess the ‘risk’ that you might pose them as a policy holder.
A very high (or low) index, may mean that there are underlying health conditions.
Check out the calculator for yourself.

Insurers, brokers and you
Insurers
Each insurer has an array different features and benefits for their various products, themselves too numerous and complex to try and distinguish them here. The products categories above are a simplified and generic view, and a method of segmenting them for future discussion. Part of a good adviser’s role is to make sure that the product selected for you matches your situation.
QuoteMonster™, an independent quoting platform that some financial advisers use for insurance, suggests that there are over 20,000 product variations in New Zealand alone. This obviously makes it extremely difficult for the general public, people like you, to navigate through all these variations and product differences.

Brokers, insurance agents, advisors
The purpose of a good financial adviser is to guide you through the process of making the purchasing decision. However, it doesn’t (and shouldn’t) end there. As a lifetime client, that adviser will be there to help you and your family on an ongoing basis, as little or as much as you need them. They can assist you to make claims, to ensure that you get the benefits that you have been paying for, and to review your product choices. The broker is your advocate.
They sell on behalf of the insurer, they help you purchase the products and benefits that suit your requirements, and then they assist your claims if (and when) they occur.
The agents are paid a commission from the insurance companies.
Price, Cost & Premiums
The primary question people ask
How much will it cost?
With so many product variations, the price is difficult to determine. It is not like buying a tin of beans. On top of the varieties of different products, a number of other factors feed into the final cost of premiums. We can, at least, outline what those are.
Below is a list of some of the key factors that influence the price of cover:

What is the total sum insured?
Age of the person insured
Gender – yes, different prices between menand women, determined by risk factors
Smoker or not (including vape & e- cigarettes)

CPI (consumer price index)
Underlying cost of the product, as determinedby each company
Certain pre-existing conditions mayincrease the premium. This will show in the Offer of Terms from the insurer
Weight. Excessive BMI (body Mass Index) willattract higher premiums

For monthly-paying benefits such as income protection and mortgage repayment insurance, there are often additional factors to consider, such as:
How quickly does the insurer start paying?
How long does the insurer pay for?
Are any additional add-ons and benefits applied to the cover

Read this article to get a better understanding of how the premiums are determined.

What if….?
A question that comes up quite often is, “what happens if the insurer fails?”
While there is not a specific guarantee on insurance companies, there are several factors to consider. Each is financially rated with a reputable agency (such as Standard & Poors). The insurance industry is regulated under the Reserve Bank (RBNZ) and the Financial Markets Authority (FMA). From a market perspective, if a company was running into difficulty, it is highly likely that the asset book (all the policies) would be sold to another insurer. The net effect on the policyholders would likely be negligible.
The insurance companies try to avoid paying claims… don’t they?
It is in the interests of insurance companies to pay claims. If they don’t, then people will stop buying their insurance, brokers will stop recommending their products and the company will become less than competitive. The top insurers make a point of telling everyone exactly how much they payout each year, to whom and why.
Most companies will pay around 90-95% of all claims made. Those that are not paid are normally due to the claim not being eligible in the first place. On rare occasions, claims are not paid due to fraud, i.e. claimants trying to claim when they are deliberately misleading the insurer.
Why do I really need insurance..?
The best explanation…
Maybe you don’t need insurance..!
If you don’t have responsibilities to anyone, if your income is fully secure for the next 30-40 years through to retirement and beyond and if you are totally debt-free, then you may not need insurance. For everyone else (!) talk to your adviser to find out more.
We hope this introduction to basic insurance products and concepts was useful. To finish, a little clarification around some common insurance terms.

Keep it simple
A brief explanation of a few terms…

The post The Basics of Personal Insurance first appeared on Bolster Risk Management - Simplifying financial risk, insurance and investments for you..

The top 8 Mistakes …when buying insurance

Dom Bish — Thu, 14 Oct 2021 22:56:50 +0000
https://bolsterriskmanagement.com/

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Not that thrilling…
…but utterly critical. No one will argue that insurance is super-exciting, and a list entitled “ways to spend my money other than on insurance” would be a long one indeed. But, simply put: insurance is an integral part of any financial plan. Because? Because the risks of not carrying insurance are simply too great.
But where do you start? It’s easy to make mistakes when buying insurance coverage – especially if you’re a bit new to all this – mistakes that can result in the loss of your assets or create an unnecessary burden on your monthly expenses. And we’ll be direct here: if you die unexpectedly, and you do not have your financial affairs in order, that burden becomes your family’s.
Taking the time to think through your requirements now, will save many weeks, months and sometimes years of pain, in the future. We reckon that’s reason enough to start a discussion. So that’s what we’re doing, beginning with a few simple bits of information that can really help you avoid those pitfalls, come up smiling and say, didn’t I do well? Yes, you did!
Many of these mistakes we discuss below may be applied across all insurance types. However, the focus here is on personal insurance, such as life, trauma, and disability cover.
Avoid these common mistakes when you’re shopping for insurance:

1. Failing to Shop Around
Companies use a bunch of different equations and calculations to determine client premiums. Some insurers will have more faith in someone of your demographic and risk profile than others. Shop around before you make a decision. It might be the most lucrative time you spend this year. With personal insurance, there are many options to consider. Use a registered financial adviser, who can look at different companies on your behalf, to guide you through that process.

2. Ignoring the importance of long-term care or disability insurance
This type of policy can take a significant bite out of your finances, but it is insurance that most people eventually need. Long-term care is expensive, but crucial. If your budget is limited (and that’s most of us) it’s possible to limit the policy to a two or five-year period to cut your premium.
3. Purchasing an inadequate amount of insurance – or too much
There are some old-school brokers still around who will encourage you to buy perhaps more cover than you should. Sometimes they’re right – bitter experience tells us that purchasing too little coverage is a bigger mistake than purchasing too much. However, purchasing too much will result in a larger expense than necessary. So, what do I do?! Exactly. A good financial adviser will help you find the sweet spot.
4. Unknowingly leaving some financial risks uninsured
Covering your debt and income are two obvious risks to insure. However, what are the future needs of you and your family? Do you have risks that might not be covered? It’s important to ensure that you have at least considered all worst-case scenarios, so that you have comfort in what is covered.
5. Not Updating Coverage
Everyone’s needs change over time. Your insurance coverage should change over time, too. Companies can also change their pricing structure. A “great deal” this year might not be as competitive next year. Re-evaluate your needs annually and after any major life event.

What is net wealth?
Simply, it is your assets less your debts.
This tool will help you add up all the things of value that you own. Then you add up all the debts that you owe people.
The calculator will then tell you your net wealth.
Check out the calculator for yourself.

6. Choosing a low premium structure for your risk strategy
Choosing to “share the risk” with the insurance company is a great way of minimising your monthly costs. However, be sure that you have a financial ‘buffer’ at hand, so that when that unfortunate event does happen, you are not left short. Any savings that you make on the premium should be added into your emergency savings account so that you can be prepared.
7. Buying coverage without background checking the provider
A quick internet reference check can save you a lot of grief. While you’ll always have to filter “review” information, if there are a lot of complaints regarding refused claims or slow response on an insurer you’re looking at, look somewhere else. Lowest price isn’t always the best option, and price shouldn’t be the only factor you take into consideration when buying. Do your homework. Again, this is something that a good financial adviser should be able to help you with.
8. Check your adviser’s motivations
While there are, in the majority, highly ethical agents that would never sell an unnecessary policy, many insurance brokers are focused on the bottom line. Their bottom line. Double-check the information and advice that your agent provides. Use an agent that you can trust, especially one that you think is in for a long-term client relationship. To be fair, in New Zealand, the recent regulations from the FMA (Financial Markets Authority) are rightly making it harder for the ‘quick-sell, slick insurance’ transactions to take place, ensuring the key focus is on developing the client relationships.

Some final thoughts
The thought of insurance can be daunting, and going through it in detail can seem confusing. But insurance provides you with fundamental, critical security. Most of us simply don’t have the financial resources to replace our home or our car, or pay large medical bills when unexpected events strike.
Insurance is a way of protecting your assets and your future.
Insurance coverage will take a portion of your monthly income – and you can decide what that proportion is – but it really is money well spent. How much it costs depends on individual circumstances.
In Australia and New Zealand, we know that many policies will cost 3-6% of the gross household income. This is not a hard and fast rule, but it does give you an indication and benchmark for financial security. Without that security, it is very difficult to plan effectively for the future, especially for retirement. If you have to spend years recovering from a financial loss due to sickness or ill health, those years are compromising, not enhancing your retirement.
And we think that’s reason enough to have “that insurance conversation.” Talk to us, or your financial adviser; we’re here to help.

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