Thousands of dollars invested in KiwiSaver by people who die before retirement age may be left sitting on ice because the legal costs of getting the money out could be more than what is in the fund, according to a superannuation expert.
Michael Littlewood, co-director of the retirement policy and research centre at Auckland University, said the prescriptive approach of the KiwiSaver Act meant there was no discretion to allocate small amounts of money to next of kin without having to go through the full legal process.
That process involved either gaining probate, where a court has to confirm the validity of a deceased person's will, or gaining letters of administration where there is no will.
The court would then allocate the inheritance based on set rules.
The cost of going through either legal process is at least $1500.
Mr Littlewood, who is also a trustee of the SuperLife KiwiSaver scheme, said he already had three cases where investors had died and the money was now sitting earning interest because the cost of getting it out was more than the amount in the account.
Mr Littlewood said with other superannuation schemes it was possible for a member to nominate who they wanted to receive the proceeds of their savings and for the trustee of the fund to allocate smaller amounts of money to a surviving family member on a discretionary basis.
Michael Chamberlain, principal of Aventine, which runs the SuperLife KiwiSaver fund, said it had asked the Inland Revenue for advice on the situation more than once, but it was still waiting to get clarification.
"If you have got someone who dies and doesn't have a lot of assets, you have got no way of paying the money out legally.
"Under the [KiwiSaver] provisions, it has to be paid to the estate. But the costs don't justify the money you are going to get."
The issue is not a problem for larger estates because they must go through the legal process in any case, and proceeds are likely to more than cover the costs involved.
Mr Chamberlain estimated as many as 600 or 700 of the 750,000 people who have signed up to KiwiSaver could have died so far.
He said the issue was relatively small but typical of the KiwiSaver Act's flaws, which existed because it had been drafted in a hurry by people who did not necessarily understand the issues associated with superannuation.
Specialist estate planning lawyer Hugh Thompson said he was not aware of any differences between other superannuation funds and KiwiSaver when it came to estate planning.
"We don't see there is any difference at all."
But Mr Littlewood said estate planning lawyers might not be aware of what happened with smaller amounts of money for superannuation funds because it was kept from going to the lawyers to avoid adding costs.
Trustee Corporations Association executive director David Brown Douglas said the law was essentially the same for KiwiSaver and other superannuation funds, but he acknowledged the law around nominating a person to inherit a KiwiSaver investment was obscure.
An IRD spokeswoman said Inland Revenue did not have a role to play in the process. - The New Zealand Herald
