What's happens with Dividend distributions when investing via Kiwisaver?

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Forums › Finance and wealth management › What's happens with Dividend distributions when investing via Kiwisaver?

thabass

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#280725 6-Jan-2021 15:01

I looking to change providers, but cannot seem to find any information about what providers do with dividends from the various share/Equites the schemes invest in.

Am I missing something here?

BlinkyBill

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#2631231 6-Jan-2021 15:14

In simple terms, they are added to the unit price of the funds. Increases in unit price come from share price increases, plus dividends. Decreases in unit prices come from decreases in unit price come from decreases in share price. Reductions in number of units comes from tax (if any) and fees (if any).

In simple terms.

wellygary

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#2631259 6-Jan-2021 15:51

As mentioned above, the cash from dividends are reinvested ...

if they were paid out you would have to declare them as income every year...

antoniosk

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#2631285 6-Jan-2021 17:03

Plus the intent with KiwiSaver is for you to build up a large position from which you can then convert the fund to providing you income in retirement.

so grow the fund while you’re not retired, and pay PIE tax rates all along the way, then when you formally declare you’re retired, you can access the funds and convert them to something else that pays income to you, or you can withdraw funds etc

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Scott3

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#2631300 6-Jan-2021 17:38

Kiwisaver funds are typically (exclusively?) managed funds.

In short, dividends go back into the fund.

Longer answer:

Your contributions get put into the fund and your ownership stake in the fund is tracked.

lets say you put in $1000 and the value of the fund was currently $999,000. Fund will now be worth $10,000,000, and you will own 1/1000th of its value. Typically most of the funds value will be invested in stuff. The value of the fund and the share each person owns of it is constantly tracked.

Any dividends for investments paid to to the fund. Fund managers will be constantly re-balancing the fund in line with is prospectus. This may for example mean the fund has to higher percentage of cash than intended. The fund managers will in this case buy more investments (likely shares) with this money.

Note that when share's go ex-dividend their values drops by the value of the dividend paid (the company is now worth less per share because they paid a whole bunch of money to shareholders), so you won't see an uptick in value of the fund when a stock goes ex dividend.

BlinkyBill

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#2631428 7-Jan-2021 07:08

wellygary:

As mentioned above, the cash from dividends are reinvested ...

if they were paid out you would have to declare them as income every year...

i don’t think this is correct for KiwiSaver funds, most if not all of which are PIE funds. Distributions (and gains) from PIE funds are non-taxable events, and don’t need to be declared.

Only income from direct investments need to be declared and any tax owing, paid.

BlinkyBill

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#2631433 7-Jan-2021 07:22

antoniosk:

Plus the intent with KiwiSaver is for you to build up a large position from which you can then convert the fund to providing you income in retirement.

so grow the fund while you’re not retired, and pay PIE tax rates all along the way, then when you formally declare you’re retired, you can access the funds and convert them to something else that pays income to you, or you can withdraw funds etc

Not sure what you mean about ‘formally declare’. You can access the KiwiSaver funds when you reach the universal retirement age, currently 65 but lots of discussion about raising this. You can still keep working, but it makes no sense to keep contributing to KiwiSaver because government contributions stop at universal retirement age.

Of course, if you don’t need the money from KiwiSaver, you can keep it running, and even keep contributing, for however long you want. And if you do need some money, you will make withdrawals on a regular or a lump-sum basis.

Long story short, once you reach universal retirement age, the KiwiSaver fund reverts to be the same as any other PIE fund; and remains active until you close it. The actual intent of of KiwiSaver is to provide an account you can’t withdraw funds from until you hit universal retirement age, and which is a platform that your employer can contribute to on your behalf.

it is important to pick the best fund and fund manager for your needs now *and* after age 65, noting the exact fund mix you will select will change over time, for best risk/reward. So you might be in growth until age 50, balanced until age 70, and conservative thereafter, for example.

eracode

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#2631441 7-Jan-2021 08:03

BlinkyBill:

wellygary:

As mentioned above, the cash from dividends are reinvested ...

if they were paid out you would have to declare them as income every year...

i don’t think this is correct for KiwiSaver funds, most if not all of which are PIE funds. Distributions (and gains) from PIE funds are non-taxable events, and don’t need to be declared.

Only income from direct investments need to be declared and any tax owing, paid.

Tax on PIE investments are taxable but income from PIE investments does not appear in your annual tax return. Tax on those investments are taken care of at source and are full and final at that point. PIE income not just doesn’t need to be declared, it can’t be declared.

PIE income is taxed at your Prescribed Investor Rate (PIR) which may be different to the rate that is used for other interest income under the Resident Withholding Tax rules - e.g. as applied by a bank on your Term Deposit investments.

The fact that your PIR may be lower than your personal marginal RWT rate gives rise to the possible tax advantages and the appeal of PIE investments.

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BlinkyBill

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#2631462 7-Jan-2021 08:40

Ok, to be absolutely clear on income distributions from funds that are PIE funds (as most or all KiwiSaver funds are): these are distributed/reinvested tax-paid at your declared Prescribed Investor Rate. This is known by IR and tax accountants as a non-taxable event.

I’m not aware of any KiwiSaver funds that would actually make cash distributions; and I’m not so sure cash distributions are even allowed for KiwiSaver funds. I’ll ask my accountant.

In any event, it is a better strategy, for KiwiSaver, to re-invest distributions rather than spend the money.

thabass

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#2631479 7-Jan-2021 09:30

Thanks All.