For future reference
There is a growing demographic trend in New Zealand of more people entering retirement than young people entering the workforce. This trend, which will continue for many years, creates a large problem: Not enough workers paying tax to fund superannuation income requirements. This is why we believe starting a KiwiSaver account should be seriously considered by everyone. We are also certain most people won't mind having a large lump sum investment maturing and at their disposal when they reach retirement age. Every client we have worked with is pleasantly surprised at how quickly their KiwiSaver balance has grown. In other words, it is a pain-free investment - it just accumulates in the background without you knowing it.
KiwiSaver: A refresher course
KiwiSaver is a savings scheme designed to help New Zealanders save for their retirement. If you're working, you can choose to contribute either 2%, 4% or 8% of your gross wage or salary. Your employer will also contribute a minimum of 3% of your gross salary.
To be eligible to join KiwiSaver, you don't have to be employed, but you do have to be either:
- A New Zealand citizen, or entitled to live in New Zealand indefinitely; and living or normally living in New Zealand,
- Under the legal retirement age, which is also the age of eligibility for NZ Superannuation*.
Unfortunately you can't join KiwiSaver if you hold a temporary, visitor, or student permit.
You should consider joining KiwiSaver when:
- You can afford to save at least 2% of your gross annual salary. It is our experience that after the first payment, you will not miss that 2%. Actually, the clients of ours who are contributing 4% do not even miss 4%.
- You plan to buy your first home any time after the next three to five years as you may be eligible for a subsidy for first home buyers. You can find more information on the deposit subsidy at www.hnzc.co.nz.
- You know it's time to start saving for your retirement.
Some great features of KiwiSaver
Even if you are not working, you can still join, and joining is voluntary (at the moment).
If you are 18 years of age or over and start a new job, your employer will automatically enrol you in KiwiSaver. You can choose to "opt out" if you would like, although once you join, you have to contribute for at least 12 months.
After contributing for 12 months, you can choose to take a contribution holiday. This means you can stop contributions, but you cannot withdraw the balance of your account until you reach the eligibility age for NZ Superannuation (currently 65, rising to 67 in 2040* see box below). We say "at the moment" as there is currently a conversation circulating about whether KiwiSaver should be compulsory or not.
|* The government announced in March, 2017, that the age for state superannuation will rise to 67 in gradual steps starting in 20 years time.
The changes will be phased in from July 2037 and will not affect anyone born before June 1972.
From 1 July 2011 the Government will pay 50 cents for every dollar of member contribution annually up to a maximum payment of $521.43. This means that you must contribute $1,042.86 annually to qualify for the maximum payment of $521.43. You can find more information about the member tax credit at www.kiwisaver.govt.nz.
Your employer will contribute 2% of your gross salary. The amount an employer is obligated to contribute has changed recently, from 4% to 2% of your gross salary. The employer contribution will be deposited into your KiwiSaver account. If your employer contributes to a superannuation account for you, there are additional conditions.
There are benefits for self-employed people. Most self-employed clients of ours choose to contribute $20.05 per week, to maximise the government tax credit of $1042.86. This course of action makes sense, as you are making a 100% return on your contribution, plus any interest growth from your account.
You may be eligible to use your KiwiSaver to help towards buying your first home. If you have been a KiwiSaver member for at least three years, you may be able to make a one-off withdrawal of all contributions and earnings on that money, except for the government's contributions, that is. There is one more factor; the government may also give you another $1,000 for every year you contribute to KiwiSaver (minimum 3 years or $3,000, maximum 5 years or $5,000) to go towards a deposit for your first home. There is eligibility criteria, so we would advise you have a good read of it at the Housing New Zealand website (www.hnzc.co.nz).
You choose who you want to manage your KiwiSaver account. When you open your KiwiSaver account, your employer may have a preferred manager (provider) for KiwiSaver, or you may have the option to choose the manager you wish. You can change your manager anytime you wish, although every manager will have different rules for switching (for example, potential exit fees), so it pays to read the small print when you are choosing your manager. There are six government-approved default managers or providers, and we suggest you choose one of these to start with until you become more familiar with the pros and cons of other providers.
Frequently asked questions
The following answers are provided as general guidelines - please talk to a financial adviser for personal, professional advice tailored for your unique situation.
Q: I am a new mum-to-be - what happens to my KiwiSaver when I stop work?
A: Your KiwiSaver will stay exactly where it is and will continue to accrue interest. Check that the IRD have been advised that there will be no further deposits from you until you start work again. Your employer will stop their 2% contributions while you are not working. You will continue getting the yearly statements for your KiwiSaver account and any other information from your KiwiSaver manager.
Q: Should I enrol my new baby in KiwiSaver?
A: We think you should, and we also think you should enrol your older children too. You can, at your discretion, contribute a small amount yourself as a long-term investment for your children. We feel passionately about the next generation developing sound financial habits, the earlier the better.
Q: What if we find things really tight financially now that we are on only one income?
A: Firstly, if your finances are very tight, it may be time for a budget review, and a call to a financial adviser for assistance would be a great course of action. Secondly, if you or your partner is paying 4% or 8%, you could consider dropping your contribution to 2%. If you are paying 2%, you could apply for a contributions holiday of up to five years.
Q: Should I pay off debt or save in KiwiSaver?
A: In financial terms, the answer is "do both at the same time", especially if you are employed. Due to the fantastic mechanics of KiwiSaver, if you contribute 4% and your employer contributes 2%, you are already making a 50% return on your KiwiSaver contribution, before the government tax credit contribution is added and before any accrued interest on your fund choice. Paying back debt is also a sound course of action, but when looking at your percentage return on your KiwiSaver contributions, it does make paying both a valid course of action.
Q: What do "default provider" and "default fund" mean?
A: A default provider is one of six companies that the government has nominated to look after the KiwiSavers who do not get a chance to choose a KiwiSaver manager. The default fund is designed by government-approved providers/managers to be used to deposit your money into after you sign into KiwiSaver.
Q: Why was I put into a default fund?
A: If your employer does not have a preferred KiwiSaver manager, the IRD will place you into a default fund with a government-chosen default fund provider. It is then up to your new KiwiSaver manager/provider to show you what other options you have with them and to match the fund that is right for you.
Q: How will I know what kind of investment fund is right for me?
A: This will depend on your risk profle - low, medium, or high. Talk to a financial adviser to find out.
Q: What is a PIE?
A: A PIE is a Portfolio Investment Entity, and being a PIE carries some important tax advantages. Not all KiwiSaver default schemes are PIEs; we suggest you check with your KiwiSaver manager to find out if your scheme is a PIE. For more information about PIEs, visit the inland revenue website (www.ird.govt.nz).
The current government annual superannuation for a single person is $16,542 and $25,450 for a couple. Even if the current rates remain the same, will this be enough for you? The demographic facts speak for themselves - you must start planning for your retirement and realise that it is up to you to contribute, rather than simply relying on the government.
As you will have picked up by now, we are big fans of KiwiSaver being a part of your retirement plan. As always, we suggest you discuss your investment requirements with your financial adviser, as they will understand your goals and advise on whether KiwiSaver is right for you.
Alden Komorowski and Dean Picard of The Insurance Professionals, have helping families as the core of their business. They are happy to answer your insurance questions or discuss your finance issues. www.theinsuranceprofessionals.co.nz. The Insurance Professionals are members of Tower Financial Advisory Services.