Incentives | Getting the money out | 2009 changes

KiwiSaver basics

• Updates for readers of "The Complete KiwiSaver" – changes since the book was published in April 2009.
• The basics - excerpts from the first chapter of "The Complete KiwiSaver" - including the government's April 2009 changes.

Updates to "The Complete KiwiSaver"

KiwiSaver changes in May 2011 Budget

The main changes are as follows:

- The tax credit has been halved, to 50c for every $1 you contribute up to $1043 a year. The maximum tax credit is therefore $521 - to the nearest dollar. This applies to the KiwiSaver year starting July 2011, so the first lower payments will be made after June 2012.

- From 1 April 2012, employer contributions will start to be taxed - at approximately the employee's tax rate. If the employee's taxable income plus the employer contribution is $16,800 or less, the tax is 10.5%. If the income plus employer contribution is $16,801 to $57,6000, the tax is 17.5%. At $57,601 to $84,000, the tax is 30%, and at more than $84,000, the tax is 33%. The tax is called the ESCT or employer superannuation contribution tax.

- From 1 April 2013, the minimum employee and employer contributions will rise to 3 per cent of pay.

The kick-start of $1,000 is unchanged.

Everyone under 65 who hasn't yet joined KiwiSaver is still wise to do so. The $1000 kick-start will continue to make first-year KiwiSaver a terrific investment.

Likewise, anyone who hasn't yet bought their first home will be silly not to save for it in KiwiSaver - as long as they can wait three years before buying their home. The government hasn't changed the help for first home buyers.

The shareholder employee situation, in which self-employed people basically employ themselves to take advantage of some features of KiwiSaver, will no longer work from April 2012.

For more detail on how the changes affect different people, see my Herald and Syndicated columns in the weeks after the May 19 2011 Budget.

Changes to providers

The following providers are no longer offering KiwiSaver: Asteron, eosaver, First NZ Capital, Huljich, IRIS and Real Property.

ABN AMRO Craigs has changed its name to Craigs Investment Partners.

ING has changed its name to OnePath.

First home subsidy

SAVINGS REQUIREMENT: The government has reduced the savings requirement for the first home subsidy. From the start of KiwiSaver, in July 2007, to 31 March 2009, you had to put in 4 per cent of your income if you were a full-time or part-time employee, and "about 4 per cent" if you were a non-employee - including the self-employed, beneficiaries and others not in the work force.

Since April 2009, employees have had to contribute at least 2 per cent of their income. For non-employees, the savings requirements are now: Beneficiaries - 2% of their gross (before-tax) benefit. Self-employed - 2% of their gross taxable income in the year prior to the financial year in which the contributions are made (look at last year's tax return). Other non-earners - 2% of the minimum annual wage, which amounts to $561.60 a year or $10.80 a week from April 2012. The minimum wage is reviewed each March or April, so keep an eye on that or simply contribute somewhat more than $10 a week to make sure you are covered.

Anyone can top up their contributions before the end of each KiwiSaver year, on June 30, to get to the required savings level for that year.

HOUSEHOLD INCOME: The government has confirmed that, to get a subsidy, your household income has to be less than $100,000 a year for one or two borrowers, or $140,000 for three or more borrowers.

HOUSE PRICE CAP: Housing NZ has announced 2012 house price caps of $400,000 in Auckland City, Wellington City and Queenstown Lakes District and $300,000 in all other areas. These caps will be reviewed annually.

Mortgage diversion

Mortgage diversion is no longer available in KiwiSaver.

Student loan repayment

The government has introduced a 10 per cent bonus for voluntary extra repayments on student loans of $500 or more in any April 1 to March 31 year. For info go to www.ird.govt.nz/studentloans/ and click on "10% bonus on payments". In some circumstances, this affects the advice in the book to join and contribute to KiwiSaver rather than making extra student loan repayments.

Here's how to work out where you stand: Subtract $20,000 from your salary. Take 30 per cent of the remaining amount. If the answer is:

• More than your student loan, pay the loan off as quickly as you can, making use of the 10 per cent bonus. Give this higher priority than contributing to KiwiSaver.

• Less than your loan, keep making just the compulsory loan repayments and contribute to KiwiSaver. Recalculate each year.

For example: You earn $50,000. Subtract $20,000 to get $30,000. Thirty per cent of that is $9000. If that is more than your loan, pay it off using the bonus.

Another way to look at it: If you figure that your compulsory payments will repay the loan in full within the next three years, make use of the bonus. If not, don't.

If you are living overseas, you pay interest on your student loan, so you should definitely use the bonus scheme, paying off as much as possible as fast as possible.

Bankruptcy

October, 2011: There have been changes to what happens if you go bankrupt while a member of KiwiSaver. The Official Assignee (OA) - who administers bankruptcy - will use your KiwiSaver money to repay your creditors, says Robyn Cox of the Ministry of Economic Development's Insolvency and Trustee Service.

There's been disagreement between the Service and some KiwiSaver providers over whether the money is available for creditors right away or if they have to wait until you reach NZ Super age. The issue may be tested in court, says Cox.

But that wouldn't make a lot of difference to you. The money in your account would be set aside to pay others sooner or later.

However, after you are discharged from bankruptcy - usually three years after you are declared bankrupt - you get a fresh start. You can contribute new money to KiwiSaver that is all yours in retirement - unless, of course, you go bankrupt again.

Note that the OA treats money in KiwiSaver no differently from other savings, whether in shares, property or anywhere else. They're all fair game to repay creditors. So this is no reason to put you off KiwiSaver.

Interest paid by Inland Revenue

From July 2007 to March 2009, Inland Revenue paid 5.36% interest (tax-paid) on KiwiSaver money while it was processing the money. That rate has since dropped. In October 2011 it was 1.95%. For the current rate, go to www.kiwisaver.govt.nz and do a search on "interest".

Exit fees

Gareth Morgan KiwiSaver has extended the period during which it won't charge an exit fee if you move to another provider. The book says it may charge $50 after 1 July 2010. That date is now 1 July 2012.

Tax on KiwiSaver - with 2012 tax rates.

• Step 1: Was your taxable income in either of the last two years 0 to $14,000? If so, your PIE rate is usually 10.5%. (But it will be higher if you had a lot of PIE income. If your taxable plus PIE income was $48,001 to $70,000, your PIE rate will be 17.5%, and if your taxable plus PIE income was $70,001 or more, your PIE rate will be 28%.)
• Step 2: If step 1 doesn’t apply, and your taxable income (excluding PIE income) in either of the last two years was $14,001 to $48,000, your PIE rate is usually 17.5%. (But if you had a lot of PIE income, so that your taxable plus PIE income was $70,001 or more, your PIE rate is 28%).
• Step 3: If neither Step 1 nor Step 2 applies, and your taxable income (excluding PIE income) in both of the last two years was $48,001 or more, your PIE rate 28%.

Working Out Your Pie Tax Rate

Income Tax Rates – these apply to bank term deposit interest etc. but not to Pie income

1. Let’s say you earn taxable income of $14,000 or less. If your total PIE income plus taxable income is $48,000 or less, it will all be taxed at only 10.5%. On a bank term deposit, if the interest brought your total taxable income above $14,000, the excess over $14,000 would be taxed at 17.5%.
2. Similarly, on the same taxable income of $14,000 or less, if your total PIE income plus taxable income is $70,000 or less, the PIE income would be taxed at only 17.5%. On a bank term deposit, if the interest brought your total taxable income above $48,000, the excess over $48,000 would be taxed at 30%.
3. Say you earn taxable income of $14,001 to $48,000. If your total PIE income plus taxable income is $70,000 or less, the PIE income would be taxed at only 17.5%. On a bank term deposit, if the interest brought your total taxable income above $48,000, the excess over $48,000 would be taxed at 30%.

1. A PIE that invests in New Zealand shares and/or in most large Australian listed shares won’t be taxed on capital gains on those shares, even if the shares are traded frequently. In the past, schemes that traded frequently did pay tax on that income. Managed funds that haven't become PIEs still do - as do some direct investors in shares.
2. If you don't currently have to file a tax return, being in a PIE won't change that. The managers of the PIE calculate the tax payable on the share of PIE income that it allocates to you. The managers then pay that to Inland Revenue without your bothering about it.

The basics

Chapter 1 of "The Complete KiwiSaver": The KiwiSaver concept and rules - including April 2009 changes

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Who's in and who's out

• Nobody has to join KiwiSaver. But practically everyone 18 to 64 who starts a new job will be automatically enrolled (unless your employer has a qualifying alternative scheme – more on that in a minute.) Shortly after joining, you can opt out if you wish.
• Anyone else — from babies to 64-year-olds, working or not working — is eligible if they are: – a New Zealand citizen, or entitled to live in New Zealand indefinitely, and – living or normally living in New Zealand, and – under the age of eligibility for NZ Super (currently 65)
• In many cases, state sector employees serving outside New Zealand and voluntary/charitable workers overseas can also join.
• If you hold a temporary, visitor or student permit you can’t join KiwiSaver.

Who is excluded from automatic sign-up?

• Those employed on a contract for 28 days or less, and the contract is not later extended.
• Casual agricultural workers employed on a day-to-day basis for no more than three months.
• Election day workers.
• Private domestic workers, such as cleaners and nannies.
• People on government paid parental leave that is paid via Inland Revenue.
• People who work for a company that has an alternative 'exempt' super scheme. New employees may join the company's exempt scheme or KiwiSaver or neither, but they won't be automatically enrolled in either.
• People who receive payments subject to withholding tax, such as directors.
• Workers for employers who are taken over, provided the workers stay on the same payroll.
• People receiving weekly compensation from ACC.

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Opting out

Joining

• Your employer's chosen provider — if your employer has made a choice.
• If your employer has not chosen a provider — and many have not — Inland Revenue will allocate you, randomly, to one of the six default providers, which are AMP, ASB, AXA, ING, Mercer and TOWER.

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Your contributions — and stopping them

• Employed KiwiSavers contribute 2%, 4% or 8% of their total before-tax income — including bonuses and overtime pay — for at least a year. The following pay is excluded from income in your contribution calculation: redundancy pay, accommodation benefits and taxable allowances for accommodation and living costs overseas. If you don't specify otherwise, you will start out at 2% when you join KiwiSaver.
• The 2% option took effect on April 1 2009. For employees who joined KiwiSaver before then, 4% was the minimum in most cases. Those who wish to switch from 4% to 2% - which is a good idea for many people - should ask their employers to make that change.
• You can change your mind, and switch your contributions from 2% to 4% or 8%, or the reverse, as often as every three months – or more often if your employer allows it.
• If an employee suffers or is likely to suffer financial hardship during their first year of membership, Inland Revenue may allow them to stop contributing before a year is up. More than 3,000 people did this in the first year of KiwiSaver. Note: While you can't stop contributions during the first year because of serious illness, you could stop if that illness is likely to cause financial hardship. And if your employment ceases, contributions will stop anyway.
• After a year in KiwiSaver, employees can keep contributing or take a contributions holiday of any period from three months to five years. While this is not the way to get the best out of KiwiSaver (see 'The smartest ways to contribute' on page 99), you might have good reason to do it. You don't have to make a case for taking a contributions holiday. All you have to do is fill out and send in a form, and it will be automatically approved. You can restart your contributions before the holiday is finished, if you wish. And you can renew the holiday when it ends, and keep doing that until retirement if you wish. Contributions holiday forms are available at www.kiwisaver.govt.nz or by ringing 0800 KIWISAVER (0800 549 472). By phone, the process should take up to 10 working days. If you send in a form, it may be a bit longer.
• At least a month before your contributions holiday is due to expire, Inland Revenue will remind you. You can then renew the holiday online at any time, or by phoning Inland Revenue. If you don't renew, when your holiday expires Inland Revenue will contact all your known employers and tell them to start making deductions again.
• KiwiTip: If you are likely to get a bonus you might want to go on a contributions holiday before that time, to avoid having 2%, 4% or 8% of that payment tied up in KiwiSaver until you are 65. You can take a holiday of just three months, or even shorter if your employer agrees to it. Don't forget, though, that you will miss out on employer contributions on that money.
• When you go on a contributions holiday, it will also apply to any other jobs you hold, even if you have been in those other jobs for less than a year. However, if you prefer, you can take a contributions holiday for one job and keep contributing from another job.
• KiwiTip: During a contributions holiday, you can still contribute any amount, regularly or occasionally, as long as your provider will accept it. Make the contributions directly to your provider or Inland Revenue, not via your employer. You won’t receive any compulsory employer contributions, but your employer may contribute anyway, and you will still receive the tax credit.
• Non-employees — including the self-employed, early retirees, beneficiaries, child carers or children — contribute whatever amount you like, as long as your provider permits that, and most are pretty flexible. Several providers will accept no contributions ever. (See 'The Minimal KiwiSaver' on page 218). Beneficiaries’ contributions are not related to the amount of their benefit and do not come out of their benefit.
• Non-employees don't have to bother with contributions holidays. You can simply stop contributing whenever you wish, as long as your provider permits that. However, it’s usually best to keep contributing, if possible, to receive the tax credit.
• If a non-employee gets a job after joining KiwiSaver, contributions will be taken from your pay. But if you have been in KiwiSaver for more than a year, you can take a contributions holiday and then you can contribute whatever amount you choose.
• Recipients of ACC weekly payments and paid parental leave payments have a choice. You can tell ACC or Inland Revenue to put 2%, 4% or 8% of your payments into KiwiSaver, or you can contribute flexibly, like a non-employee. Either way, you won't get employer contributions.

How much is 2% of your pay?

How much is 2% for you?

1. With a calculator, multiply your weekly, fortnightly or annual before-tax pay by 0.02.
2. Without a calculator, start with your weekly, fortnightly or annual before-tax pay. Move the decimal point two places to the left, and multiply by two. For example, if you make $237.00 a week, change that to $2.37 and multiply by 2 to get $4.74 a week. Or if you make $46,649.00 a year, change that to $466.49 and multiply by 2 to get $932.98 a year.
3. Go to the Retirement Commission’s website, www.sorted.org.nz and use the Quick KiwiSaver calculator.

Contributing extra money

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Incentives

• After three months, the government will contribute a kick-start of $1,000. This applies to everyone in KiwiSaver, adult or child. You can receive only one kick-start ever in your life.
• If you are over 18, the government will contribute a 'tax credit' of $1043 ($20 a week) every year, as long as you have contributed at least that much during the KiwiSaver year, which runs from July 1 to June 30. If you've contributed less, the government will deposit the same amount as you contributed. Despite the name, you don't have to pay tax to get the tax credit. It's more like a government gift. If you leave New Zealand, generally you won't get tax credits even if you continue to contribute. People under 18 are not eligible for the tax credit.

Tax credit timing

• The date the account was opened by your scheme.
• The first day of the month in which deductions were first made from your pay.
• The first of the month when your provider or Inland Revenue received your first contribution.

• If you are an employee over 18 and you are contributing to KiwiSaver, your employer must contribute an amount equal to 2% of your total before-tax income — unless they are contributing to another qualifying super scheme of which you are a member. (The employer contribution was 1% from April 2008 to April 2009. It was previously scheduled to rise to 3% from April 2010 and 4% from April 2011 onwards, but those increases have now been cancelled.) Compulsory employer contributions do not have to be paid to people under 18.
• Some employers are contributing more than the required amount to their employees' KiwiSaver accounts. However, there are tax ramifications of this. See 'The good news about tax' on page 41.
• You can use some of your KiwiSaver money to buy your first home. And, if you are eligible, the government will also contribute towards the purchase of your first home — starting at $3,000 if you have been contributing to KiwiSaver for three years, ranging up to $5,000 if you have contributed for five years. A couple can get up to $10,000. (See ‘Help with buying a first home’ on page 120.)
• KiwiTip: If you have previously owned a home but no longer do, and Housing New Zealand determines that you are in the same financial situation as a first-time buyer, you may also be eligible for a government subsidy towards buying a home. (See ‘No longer own your home’ on page 124.)

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Investing

• KiwiSaver investments are managed by private sector companies called providers, which must meet some specific government requirements. While a few providers offer just one KiwiSaver savings fund, most offer a choice of funds that invest in different types of assets — usually ranging from low-risk to higher-risk. Some also allow you to set your own investment strategy. (For more on this, see Part 4.)
• Each person can be in only one KiwiSaver scheme — although many providers will let you be in more than one fund within their scheme. You can change your provider at any time, although a few providers will charge an exit fee. (See ‘Switching provider’ on page 192)
• The government doesn’t guarantee you won’t lose money in KiwiSaver. But as long as you choose your provider and fund wisely — and this book gives you the guidance you need on that — it’s highly unlikely that you will lose the money you put in, and highly likely you will end up with much more. For more on investing your KiwiSaver money, see Part 3, What type of Investment?

What’s what?

• Provider — the company that runs a KiwiSaver scheme (or in some cases the company that markets and distributes the scheme – the 'public face').
• Scheme — The whole KiwiSaver package offered by a provider. A KiwiSaver scheme is a separate superannuation scheme that's registered under the KiwiSaver Act 2006.
• Fund — An investment fund within a scheme. While a few schemes offer just one fund, most offer several funds, usually with varying degrees of risk.

Ownership

• Your KiwiSaver savings — including money contributed by the government and your employer — remain yours, whether you change jobs or stop or start working. The only exception — and it’s not likely to be common — is if your employer contributes more than the compulsory amount and includes ’vesting’ rules. That means you will be entitled to the employer’s extra contributions only if you continue to work for that employer for a certain period.
• In the normal course of events, there’s only one situation in which any of the money can be taken away from you. That's if you leave New Zealand permanently and want the use of your money before retirement — in which case the government takes back the tax credits. (See 'Heading overseas' on page 138.) It’s also possible that KiwiSaver money could be taken from you in a divorce settlement or bankruptcy. See the next section.

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Getting the money out

1. If you suffer significant financial hardship you can withdraw some or all of your contributions, employer contributions, and investment returns earned on your money (interest, dividends etc) — in other words, everything but the $1,000 kick-start and tax credits. Note, though, that the trustees of your fund will release only an amount that will ‘ease financial suffering’ — not necessarily the full amount. You will have to fill out a statutory declaration, listing your assets and debts.
2. If you suffer serious illness (permanent and total disability or near death) you can withdraw all your KiwiSaver money. You will need to supply medical evidence to your KiwiSaver provider’s trustee.
3. If you leave New Zealand permanently, after a year you can withdraw everything except the tax credits, which will be returned to the government. But if you wait until you reach NZ Super age you can withdraw all money even while overseas. (See ‘Heading overseas’ on page 138.)
4. If you are buying a first home, or are in the same financial situation as a first-time buyer, after three years of membership you can withdraw your contributions, any compulsory employer contributions and all investment returns. If your employer has also made extra contributions, you may be able to get that money out too. (See ‘Help with buying a first home’ on page 120, and 'No longer own your home?' on page 124.)
5. After a year of contributing, you can divert half of your contributions to payments on your home mortgage if your provider and mortgage lender permit that. (See 'Mortgage diversion' on page 126.)
6. If your marriage or similar relationship breaks up, your KiwiSaver account is treated like other savings. The money is relationship property to the extent it was contributed during the relationship. In some circumstances, a court may order some or possibly all of your KiwiSaver money to be transferred to your former partner, or your partner may get more other assets to offset your KiwiSaver account.
7. When you die, at whatever age, your KiwiSaver money goes to your estate. It's available to your heirs at that time. If you are under 65 when you die, they don't have to wait until you would have been 65. However, there have been some delays in distributing KiwiSaver inheritances. See sidebar.

KiwiSaver beneficiaries kept waiting

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The good news about tax

• The highest tax rate for any investor in a PIE is 30%. This is a tax break for people in the top two tax brackets – those earning more than $48,000 (rising to $50,000 from April 2010). It's particularly good for those in the top bracket, earning more than $70,000.
• Lower-income investors are in most cases taxed at 19.5% on their PIE income. This is of some help to those earning $14,000 to $48,000 ($50,000 from April 2010), who currently pay 21%. However, people earning less than $14,000 – who pay 12.5% in tax - are worse off in a PIE investment. Hopefully, the government will change the PIE rates soon so that this is no longer the case.
• If, in either of the two prior years, your non-PIE taxable income is below $38,000 a year, and your total taxable income including PIE income is below $60,000 a year, then all of your PIE income will be taxed at 19.5%. It sounds a bit complicated, but think it through. If it would apply to you, it could mean big tax savings.
• A PIE that invests in New Zealand shares and/or in most large Australian listed shares won't be taxed on capital gains on those shares, even if the shares are traded frequently. In the past, schemes that traded frequently did pay tax on that income. Managed funds that haven't become PIEs still do - as do some direct investors in shares.
• If you don't currently have to file a tax return, being in a PIE won't change that. The managers of the PIE calculate the tax payable on the share of PIE income that it allocates to you. The managers then pay that to Inland Revenue without your bothering about it.
• As long as your PIE income doesn't have to be declared on a tax return, it won’t affect entitlements such as Working for Families, child support, or repayments on student loans. This could make a big difference to some people.

• The KiwiSaver member tax credit — of up to $1,043 a year — has nothing to do with tax, and you don’t have to pay tax to receive it. It is a tax-free payment of government money into your KiwiSaver account.
• The other government contribution, the $1,000 kick-start, is tax-free. So is interest paid by Inland Revenue on KiwiSaver money while it is held by the department, en route to a provider.
• Employees’ contributions are 2%, 4% or 8% of their total before-tax pay. But the money is taken out of after-tax pay, so it will be more than 2%, 4% or 8% of after-tax pay. For example, an employee earning $50,000 contributes 2% or $1,000. But that person’s after-tax pay is $40,450, and $1,000 is about 2.5% of that after-tax amount. Some people have called this a ripoff, but it’s money going into your own KiwiSaver account, so I don’t see it that way.
• Employers' contributions to KiwiSaver — up to the lower of the employee’s contributions or 2% of the employee’s total pay — are not taxed. The employee gets to keep the full employer contributions in their KiwiSaver account. If an employer contributes more, employer’s superannuation contribution tax (ESCT) will be taken out before the money goes into your KiwiSaver account – although in some cases the employer will effectively pay that tax for you, so you get the full amount in your account.
• You won't have to pay any tax when you take money out of your KiwiSaver account in retirement, or to buy a first home or at any other time.

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Two employer approaches

• Some employers simply make contributions over and above ordinary pay. They might argue that is fair because most employees can join KiwiSaver if they wish.
• Other employers use what is sometimes called 'total remuneration.' Under such a system, the employer might, for example, say to a non-KiwiSaver employee, 'I will give you a 3% remuneration increase in the upcoming year, but 2% of that increase is tagged as a KiwiSaver allowance. If you're in KiwiSaver – or you later join - you will get the allowance in the form of my KiwiSaver employer contribution. If you don't join KiwiSaver - or while you are on a contributions holiday - you can instead take the allowance as cash in your regular pay.'

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