What you should know about KiwiSaver hardship withdrawals

New Zealanders struggling with the cost of living have been turning to their KiwiSaver accounts in greater numbers.

Treasury data shows that 3,700 people withdrew their savings due to financial difficulties in April, compared to 1,820 in the same month a year earlier. They withdrew a combined $30.1 million, up from $14.1 million in 2023.

Since November last year, the number of hardship withdrawals has consistently exceeded first home withdrawals. Before that time, first home withdrawals had always been the largest number.

So what do you need to know if you’re considering having your KiwiSaver help you get through a tough time?

There are rules

There are set rules about when a KiwiSaver provider can give money to a member due to financial hardship. And although the provider accepts the documentation and processes the transaction, it is actually the plan supervisor (Public Trust, Guardian Trust or Trustees Executors) who makes the final decision.

To request withdrawal, you must be able to provide evidence that you are suffering significant financial hardship; That could mean not being able to cover your minimum living expenses, not being able to pay for medical treatment, or something like the cost of a funeral for a dependent.

The amount that can be withdrawn is linked to what the supervisor considers sufficient to cover the difficulties.

If you withdraw because you can’t cover minimum living costs, the amount you can withdraw is usually equal to about 13 weeks of expenses.

Amy Cavanaugh, director of transformation for corporate trustee services at Public Trust, said hardship claims had increased year-over-year since 2022.

The Public Trust received 9,165 hardship withdrawal applications in 2023. In the current financial year, which runs 10 months, 11,987 applications were assessed.

“What we’re seeing is more cases where something that people previously would have had savings to cover, they can no longer do.”

People were struggling with living costs, he said.

“There are more and more requests for minimum living expenses, whereas before it was about vehicle repair costs or a contribution to an arrears loan. Now it is about living expenses.”

Tom Hartmann, personal finance leader at Sorted, said the amount people were withdrawing had risen from an average of $6,927 in the year to March 2023 to $7,923 this year.

You can’t pay the debt

You can request to use your KiwiSaver to clear arrears or keep up to date with payments when you don’t receive enough money but can’t use it to pay debts.

This is something that, according to Financial Services Complaints Ltd, a third-party dispute resolution system, has been the cause of complaints for some members.

Hartmann said it was natural to think about using money to pay off debt, but withdrawals couldn’t be used to settle credit card debt, fines, debt collection agency fees or hire purchase debt for anything non-essential. .

“You can make a withdrawal when you can’t cover your bills and everyday expenses, including mortgage payments, but you can’t make a hardship withdrawal and draw down the entire KiwiSaver fund against the mortgage.”

It is not easier to leave one provider than another

Despite what some TikTokers may have you believe, one scheme is no more likely to approve a request than another.

All supervisors operate by a similar set of rules.

Cavanaugh said the rules were set out in legislation and there was industry-wide guidance that supervisors used to evaluate an application.

He said that in a minimum living costs application, the supervisor would look for documentation showing evidence that the person was in financial difficulty and had to spend more than they earned.

“We approve most requests. If the member can provide the requested documentation, we ask them to sign a legal declaration along with it and if it meets the criteria, we approve it. At the end of the day, it’s your money. “

Hartmann said the supervisors’ approach was uniform.

“We don’t want there to be myths about ‘this KiwiSaver provider, switch to them, it’s easier to get money’.”

It has an impact on the retirement outcome.

If you withdraw money from your KiwiSaver now, you can expect it to affect the amount you have available when you retire.

Hartmann estimated that an $8,000 hardship withdrawal would cost someone about $50,000 of their ending retirement balance over a 30-year investment time horizon.

“Hardship withdrawals may be appropriate, but should be a last resort.”

Cavanaugh said applicants would have to show they have explored other options. That might mean talking to a lender about a loan that was causing problems, or about Work and Income if they had lost their job.

Hartmann said the number of people accessing KiwiSaver was still small – around 1% of all members last year, compared to 0.6% the year before.

“If you look at the amount that is withdrawn, it is a small part of the total funds under management – it looks like about 0.2% over the last year, compared to 0.14% the year before.”

Rupert Carlyon, founder of the Koura KiwiSaver scheme, said it made sense for people to turn to KiwiSaver in difficult times. This was the first major crisis in which people had balances worth tapping into, he said.

“At the end of the day, KiwiSaver is there to help people when they need it. As a provider, I think it’s important we let people know they can use it.”

Beware of scams

Hartmann said Sorted was aware that money in KiwiSaver could be a target for scammers.

“There may be some of that too: ‘we’ll help you make a hardship withdrawal’ and then it’s directed. That’s a definite concern.”

KiwiSaver members should deal directly with their provider to manage a request, or with an authorized financial advisor they have already had contact with, not a new third party.

By Susan Edmunds of rnz.co.nz