How KiwiSaver could give kids tens of thousands of dollars

Kids' KiwiSaver is back on the agenda for this year's election.

National is proposing to automatically enrol all babies in KiwiSaver when they are born, with a $1500 kickstart. NZ First has also said it would want to make KiwiSaver compulsory at birth, with a $1000 contribution for New Zealand citizens.

But if your kids are already here, how can you set up their KiwiSaver accounts now? And should you?

Compounding growth

Children can do really well out of investing, because they have time on their sides.

Even without a $1500 kickstart, someone who started investing at birth in a fund that returned 5 percent a year would have about $30,000 by the time they were 25 if their parents could put aside $50 a month. This does not include any employer or employee contributions that person might make when they entered the workforce.

If the family could save $100 a month they would have almost $60,000 and, if $500 a month was invested for 25 years from birth they would have almost $300,000.

Many funds will deliver more than 5 percent in some years, but less than 5 percent in others.

Kernel founder Dean Anderson said investing would teach kids a powerful financial lesson about compounding. "How even a small investment amount can grow to something big over time. Parents can start small and still have a big impact."

He said he would welcome a $1500 kickstart as National had suggested, but would prefer a smaller annual contribution until age 16, the equivalent of the current government contribution of $260 a year. "This shows the benefit of time and regular investing."

Choose the right fund

Kids can usually afford to take significant risks with their investments because they won't need their money for a long time, even if they are saving for a first home rather than retirement.

Anderson said parents did not need to wait for politicians to make decisions about KiwiSaver.

"You can create a kids' investing account today and start with a small investment each pay cycle. Equally, it can be rewarding for the whole family - grandparents and family could top up their investment account on birthdays rather than wasted toys.

"As time is on their side, with 15 or 20 years [to invest], then you would be looking for a low fee high growth fund. This higher exposure to the share market would have higher expected returns over the long term, and as time is on their side they won't be impacted by the greater ups and downs along the way."

Fisher Funds, business transformation lead at Fisher Funds, said the first and biggest step was often just getting started.

"It doesn't have to be perfect. It can just be a simple habit of starting to save something and just having a really clear purpose and understanding of what you're doing for it. That gives it a little bit more gravity when you think about the long-term impact as well.

"When it has the opportunity to compound, it's a really significant impact... we always say the earlier the better."

To start a kids' account with a KiwiSaver provider, you'll need to provide identification for your child and yourself, their IRD number and proof of your address.

Is KiwiSaver the right place to do it?

The number of people aged under 17 in KiwiSaver has halved over the past decade, since the $1000 kickstart incentive was removed.

Some parents have decided that it makes more sense to set up savings for their kids outside KiwiSaver, if there are no incentives to be in the scheme.

Sloan said there were still benefits to being in KiwiSaver, even if it locked the money up in a way that other investments would not.

"There is a bit of a hidden benefit with KiwiSaver. It's really clear what you're likely investing for.

"It's potentially going to be for a first home and that's a really nice, long-term sort of future vision for retirement as well.

"The simplicity actually makes it easier to get things right and get into a habit and momentum. You have an opportunity to bring your kids, as they start to get a bit older, on that investing journey, get them familiar with things, talk tot hem about it, and it makes it a bit more real as opposed to something that just turns up in the future when you get your first job."

Once your child is in KiwiSaver, you can make payments to their account via your internet banking.

Sign up for Money with Susan Edmunds, a weekly newsletter covering all the things that affect how we make and spend money