How KiwiSaver could help kids into their first home

The sum of money invested grows over time.
For $20 per week, your 10-year-old could have $14,000 once they turn 18. Photo credit: Getty.

KiwiSaver helps Kiwis save for their retirement and may also be the key to helping the kids save for their first home. 

Newshub asked two KiwiSaver experts about the benefits of getting kids into KiwiSaver and how asking relatives to chip in could amount to a sizable sum in the future.

Martin Hawes, a financial adviser and author, said the beauty of starting early is it gives kids a headstart in saving for their first home. There's no fixed contribution amount and once the child turns 18 and starts working, employer and Government contributions kick in automatically.

"For parents and grandparents, uncles, aunties, etc, KiwiSaver is a very convenient way to give some money to a child which will be used for a good purpose," Hawes said.

This isn't necessarily retirement in 60 plus years, but saving for their first home.

"I encourage people to sign their children up for KiwiSaver and put a small amount, (e.g. $2 or $5 per week) in," Hawes said. 

Murray Harris, head of KiwiSaver and distribution at Milford Asset Management, said that KiwiSaver can teach kids about investment basics and the effects of compounding interest over time can be significant.

"If they've got money invested in a KiwiSaver fund and, for example, that money is invested in companies like Air New Zealand, A2 milk and Spark, they can understand that 'My parents are buying those products and using those services, and I am a shareholder in them'," Harris said.

"As an example, starting at age 10 through to age 18, if you're putting in $1040 per annum [$20 per week], based on current investment returns, the compound effect of that at age 18 is just over $14,000*," Harris added.

The downside is that for a 10-year-old, understanding the value of money on paper and not being able to get their hands on it till they're 65 may be beyond comprehension.

"However, in another ten years' time, if a 20-year-old wanted to access their KiwiSaver for their first home deposit, with the added benefits of their own money, and government and employer contributions, that may well have been the best gift a grandparent could've given them," Harris added.

On top of the KiwiSaver first home withdrawal, depending on how much they earn and the value and area of the home they want to buy, once they're 18, the First Home Grant could also help out.

The following questions and answers provide more detail on KiwiSaver for kids.

What should I look for in a provider?

Harris said member and investment management fees, a consistent track record for investment returns and service are all important factors - and should be considered as part of the overall package.

"Whilst there might be half-a-percent annual fee difference between one provider and another, if the more expensive provider can provide a consistent return of 1-2 percent better year after year, that's going to be much more valuable than [the] saving on fees," Harris said. 

"From a service perspective, [does the provider] send regular reports, can the account balance and transactions be viewed online and if you have a question, is there someone you can pick up the phone and talk to?" Harris suggested.

While most KiwiSaver providers apply an annual fee and a management fee, some providers waive fees for children under 18 and balances under $5000.

"One of the important things about KiwiSaver for children is that [they] can watch the balance grow," Hawes added.

"You may want the childrens' KiwiSaver with your own one, so it's easy to go to," Hawes suggested.

What type of fund might be suitable?

KiwiSaver providers typically have different fund options that have the potential to earn returns that reflect their level of risk.

"For a child aged 10 who is unlikely to be buying their first home, [an investor] could assume a growth strategy," Harris said.

"As they approach closer towards buying, they could switch to a conservative fund," Harris added.

A person's age and what they're wanting to achieve makes a significant difference to the type of fund they may choose.  

"If you need to access your money within the next five years, you would want to invest in a conservative fund.

"If it's five-to-ten years, you would take a balanced approach, or in ten years' or more, you can take more risk: a growth fund would be more appropriate," Harris explained.

What is the tax rate for a child?

KiwiSaver investment income is taxed regardless of age.

A spokesperson for Inland Revenue confirmed that while the tax rate depends on the Prescribed Investor (tax) Rate (PIR) that the investor has chosen, for children, in most cases the PIR is 10.5 percent.

When do the Government contributions start?

KiwiSaver members become eligible for Government contributions from the day a member turns 18.  

"They must only begin contributing if they're in paid employment," an Inland Revenue spokesperson confirmed.

How can kids opt out?

Kids turning 18 who start working and want to use their income to fund study or travel plans rather than save for their first home or retirement can ask to put their contributions on hold.

Providing they've been a member for one year, they can apply for a 'savings suspension', for between three months and one year.

"At the end of that one year, they can reapply - and must reapply every 12 months [as required]," Hawes confirmed,

As with any investment, KiwiSaver isn't risk-free and as funds are market-linked, returns can fluctuate over time.  

With cheap toys and gadgets on the rise, it can be easy to shell out $20 here and there.

Helping kids understand that money doesn't grow on trees is an important life lesson and drip-feeding those savings into KiwiSaver now could put the kids in a better position to call their own shots later in life.

*The KiwiSaver return (after fees and before tax) is based on the Morningstar KiwiSaver average investment return for the 'Growth' category over the last 10 years (9.9 percent), equating to approximately $5,680 in investment earnings.  Member fee differs between providers.