Dipping into KiwiSaver for financial hardship could have 'catastrophic impact' on retirement funds - expert

Concept of savings growing over time.
Withdrawing savings now could result in 25 percent less income at retirement. Photo credit: Getty.

Withdrawing KiwiSaver funds on the basis of financial hardship compromises retirement and should only be considered as a last resort, a financial expert says.

COVID-19 has put an increasing number of Kiwis under financial strain. Inland Revenue figures show that since May 2019, over 1000 KiwiSaver members withdrew savings each month due to financial hardship. In May 2020, 1690 members withdrew savings totalling $13 million, up 38 percent year-on-year.

KiwiSaver members who are experiencing significant financial hardship can apply to withdraw their existing savings, excluding Government contributions and the former kick-start.   

But as COVID-19 has caused share prices to fall and KiwiSaver balances to drop, withdrawing funds locks in those losses. According to KiwiSaver advice provider National Capital, dipping into KiwiSaver now could have "catastrophic impact" on income at retirement.

"For example, if a 50-year-old woman earning $60,000 a year were to withdraw $20,000 from her KiwiSaver [account], at 65 her total balance would be 25 percent less than if she had not touched it at all," director Clive Fernandes said.

A recent survey of 1000 people commissioned by National Capital found that two-thirds of those aged between 45 to 54 expected to be in a better financial position than they were currently and 44 percent felt anxious about the future.  

Despite this, only 20 percent said retirement planning was a priority within the next six months. 

"KiwiSaver could and should be playing a more significant role in helping people retire with more, yet the research shows it's not being maximised," Fernandes added.

As an alternative to withdrawing their retirement funds, people facing hardship could look at where expenses could be cut back, and check if they're eligible for COVID-19 income relief  or other Government support.

To save money in the short-term, members can take a break from KiwiSaver. An online request can be made through 'MyIR'.  Personal contributions can be suspended for three months to one year. Employer contributions also go on hold and the Government contribution of $521.43 won't be paid unless they put in a minimum of $1042.86 over the year. 

"While you’re on a savings suspension you will not get employer contributions unless your employment agreement states otherwise. If you want to get the Government contribution, you may need to make voluntary payments," the IRD website states.

Amidst concerns that Kiwis may not realise the impact of withdrawing retirement savings following COVID-19, the Financial Markets Authority and Commission for Financial Capability urged Kiwis in April to consider other support first.

"While retirement may feel like a lifetime away, it requires its own savings strategy and KiwiSaver is the best opportunity to ensure you can retire comfortably," Fernandes added.

KiwiSaver members can check how their savings are tracking by looking at the estimated balance at retirement, shown on their annual statement. Based on weekly living expenses from 2019 retirement expenditure guidelines published by Massey University, a single person living in a metropolitan area with $600 per week in expenses wanting a no-frills lifestyle would need a minimum of $187,000 above NZ Super.

People facing job loss or who have fallen on difficult times can get free budgeting support through Citizens Advice Bureau, Salvation Army, Money Talks and Christians Against Poverty.  Those financially impacted by COVID-19 may be able to get an interest-free loan through charitable organisations such as Good Shepherd.

More information about KiwiSaver financial hardship withdrawals can be found on the Sorted and IRD websites. Before applying to withdraw funds, KiwiSaver members are urged to consider other support and discuss their situation with their KiwiSaver provider or adviser.