KiwiSaver Update

There are important changes ahead for KiwiSaver members. From 1 April, employers will be required to increase their contribution to 2% of pay, but it won’t increase to 4% as planned by the previous government.

Members will also be able to decrease their contribution from 4% to 2% by informing their employer in writing. The fee subsidy of $40 per year will disappear and employers will lose the tax credit on their contributions.

From a KiwiSaver member’s point of view, the best thing about KiwiSaver is the tax free benefits you get by way of the Government tax credit of up to $1,040 per year and the employer contribution, which is additional to your pay.

These benefits make joining KiwiSaver a logical choice for most people. From 1 April, you will have the choice of contributing 2%, 4% or 8% of your pay.

The best plan, especially when you have still debts to pay off such as a mortgage or credit card, is to contribute whatever you need in order to get the full amount of the Government tax credit.

The tax credit matches your contributions up to a maximum of $1,040 so if you are earning less than $52,000 gross per year you will need to put in 4% of your pay to get the full tax credit and if you are earning less than $26,000 gross per year you will need to put in 8% of your pay to get the full tax credit.

The new contribution rate of 2% is great news for high income earners. For example, someone who earns $150,000 gross per year would previously have had to contribute 4% or $6,000 per year to get the tax credit of $1,040 and an employer contribution of $1,500 (rising to $3,000 on 1 April). By lowering the contribution to 2% that person will now get the same level of benefit for a contribution of only $3,000.

There are some employers who choose to contribute more to members’ schemes than what they are legally required to do. Sometimes this is a matched contribution and sometimes it is a set percentage regardless of your contribution level. If you belong to such a scheme where your contribution is matched, then you should consider contributing up to the level to which your employer will match your contributions; otherwise contribute up to the level where you get the maximum Government tax credit.

Dropping your KiwiSaver contribution down to 2% may mean that you are no longer saving enough for your retirement goals. If you still have debts such as a mortgage or credit card debt, then your focus should be on using any surplus cash to reduce that debt. If you have no debts, consider supplementing your KiwiSaver retirement saving with saving into a diversified Portfolio Investment Entity (PIE).

The advantage of doing this is that your retirement funds in the PIE will be accessible should you need them before you retire. Many KiwiSavers have been enrolled by their employer into a default KiwiSaver scheme. If you are in a default scheme, contact your provider to find out more about what your investment options are, because it is likely that your money is being invested in a conservative fund which may not be appropriate for your retirement needs.

Remember that if you are self employed, you can still join KiwiSaver by enrolling directly with a provider and you will receive the Government tax credit. To get the full tax credit, you will need to contribute at least $1,040 per year. If in doubt, get advice on which KiwiSaver scheme to use and what your contributions should be.