OCR cuts heat up KiwiSaver for retirees
The Reserve Bank's recent cut to the official cash rate (OCR) is not only lowering interest rates, it's making KiwiSaver an attractive alternative for retirees with savings in the bank.
The OCR affects the price of borrowing money in New Zealand, where wholesale borrowing by banks flows through to the interest rates which they offer for mortgages or term deposit investments. Once the latest cut was announced, banks followed suit with lower interest rates, making borrowing cheaper but also lowering returns for those with savings.
With further cuts signalled for later this year, the impact on interest rates that affect retirees' bank savings may be even greater.
Because lower interest rates put downward pressure on the New Zealand dollar, commodities such as petrol become more expensive, as do overseas trips. Retirees that rely on their savings to travel or support a comfortable lifestyle will now need their money to work harder to do the same.
Insurance and retirement savings provider AMP says by keeping funds in KiwiSaver after 65, retirees can get potentially greater returns and benefits than traditional savings plans such as term deposits.
"In the past, many people turning 65 have withdrawn their KiwiSaver funds and placed them in a term deposit because they're easy to understand and viewed as low risk," Blair Vernon, AMP's Director of Advice and Sales says.
"KiwiSaver now offers a great alternative for people that want to make their retirement savings work better for them."
As an example, Vernon points out KiwiSaver conservative fund returns last year were much more favourable when compared to term deposit rates offered by the major banks.
"It's hard to ignore the data. The main KiwiSaver conservative funds average return for the last financial year was 8.2 percent, but if you'd had your money in the bank on a 12-month term deposit over the same period, that would have returned about 4.3 percent."
Term deposits are locked away for a period of time with a set notice period required to withdraw. You can access the money earlier but there are break fees and the interest rate may also reduce. With KiwiSaver, eligible members 65 or older can withdraw funds whenever they choose."
KiwiSaver can also be used to consolidate other savings investments and using it as a source of regular income with regular payments to members' bank accounts.
Currently, you are eligible to withdraw all your savings as a lump sum when you qualify for NZ Super (currently at the age of 65), as long as you've been a KiwiSaver member for a minimum of five years.
It's also important to note that once you leave KiwiSaver after you're 65, you can't get back in. No longer is it as common for people to stop working completely once they reach 65. Many people are now working into their seventies and beyond, or deciding that it's an opportunity to start something they've always wanted to do.
"More and more people are going back to work after they retire. A good idea if you don't want to contribute for now is to stop your contributions, but remain a KiwiSaver member. That way you can restart at a later date if you decide to start working again, even if it's part-time," says Vernon.
"Choosing the right investment can have a significant impact on your quality of life and the ability to do the things you enjoy once you do decide to stop working.
"Those interest rates look set to drop even further this year. If you're retired or getting close to retirement it's worth having a conversation with a financial adviser about options for your retirement savings in today's market," he adds.
Although lower interest rates can have a negative impact on savings investments, KiwiSaver has never looked like a better alternative for retirees seeking to get the most out of their money.
Disclaimer: Information provided is stated accurately to the best of the respondent's knowledge at the time of publication. It is general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice before making an investment decision.