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Syndicated column 26 February 2011 - More reasons to get young into savings accounts
An article I read recently made me more convinced that it's good to sign up children into savings accounts.
When KiwiSaver started, in 2007, I was telling everyone to get their kids into the scheme. But then the government phased out the $40 annual fee subsidy - and this affected children more than adults.
Why? Let's start with the fact that children under 18 don't receive the tax credit, nor compulsory employer contributions.
It makes sense, therefore, to make no further contributions after opening a child's account and getting the $1,000 kick-start. Any extra input is not matched by government or employer money, and the money is tied up until the account holder buys a first home or retires. It's probably better to save elsewhere, so the child can later use the money for education or to start a business.
Because of this, many children's KiwiSaver accounts hold just the kick-start - or not much more. And that was fine while the fee subsidy was available. The $40 covered all or most fees, so accounts could grow over the years.
However, without the fee subsidy it's possible that fees will exceed returns. With no new contributions, the balance will decrease. A child in KiwiSaver from babyhood could have a lower balance at 18 than a classmate who has just signed up.
I'm not saying this is likely. Long-term returns usually exceed fees. But the possibility has dampened my enthusiasm for putting kids into the scheme.
Then I read the article, by Professor Julian Le Grand of the London School of Economics, about several "longitudinal studies" - which look at the same people over a long period.
The research "showed that young adults with a small amount of capital at the beginning of adulthood had a significant advantage ten years later over those who did not, with more employment, higher earnings and better health," said Le Grand.
Well yes, I thought, but they probably also had parents who encouraged good habits. But that was covered. The researchers found the effect after taking into account differences in income, family background and education,
"Ownership of even a small amount of capital assets encouraged people to invest, to save and to think about the future," said Le Grand. They gained "a psychological and economic independence of position and thought."
It's quite feasible, really. It's about having a stake in the system.
There's also another advantage of getting children into KiwiSaver. If they are not in the scheme at 18, many won't get around to joining, at least for a few years. And even two years can make a huge difference to total retirement savings.
Assume Bill is the exception, who joins KiwiSaver at 18. He contributes 2 per cent of his pay, which starts at $50,000 and rises 3 per cent a year. If the account earns 5 per cent a year after fees and taxes, it will total about $800,000 when Bill is 65.
Meanwhile, Jill doesn't join until 20. Her pay, contributions and KiwiSaver returns are the same as Bill's. At 65, her account will total only about $709,000.
Why such a big difference? Firstly, when balances are big, they grow fast. Two more years of 5 per cent growth turns $709,000 into nearly $782,000.
Secondly, by the time he is 63, Bill's pay will have way more than tripled. So two more years of contributions are noticeable, even if the government's maximum tax credit stays at $1043.
Still need convincing to sign up the kids in KiwiSaver? The government - strapped for cash - could reduce the kick-start. Get in while it's still $1000.
* Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance (see www.maryholm.com). Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following the advice. You can contact her at firstname.lastname@example.org, or by mail care of this newspaper. Please name the newspaper in which you read this column. Sorry, but she cannot respond directly to readers.
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