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The following is based on excerpts from "The Complete KiwiSaver" by Mary Holm, 2009. The content has been updated to include changes that took place up to June 2015.
This page includes:
Part 1: KiwiSaver concept and rules
Who's in and who's out
Who is excluded from automatic sign-up
Your contributions and stopping them
Getting the money out
The good news about tax
Two employer approaches
Part 2: Creative ways with KiwiSaver
The smartest ways to contribute
Non-employees can get first year over and done with
Assisting family or friends
Part 3: Did you realise?
Part 1: KiwiSaver concept and rules
There is still widespread misunderstanding about KiwiSaver. Generally, it is more flexible and generous than many people realise. Chances are that you’ll learn something from this chapter.
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?
The following people won't be automatically enrolled when they start a job – although they can join if they wish, or continue contributions if they are already members:
- 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.
If you have been automatically enrolled in KiwiSaver and you don’t want to belong, you can opt out any time from two to eight weeks after you joined.
But think hard before opting out. Your reason for not staying in KiwiSaver is highly likely not to be valid. And KiwiSaver is a particularly good way to save for your first home. Even if you're not interested in buying a first home, you'll miss out on lots of ‘free money’. And KiwiSaver commitments are much less than you probably realise.
Okay, I'm off my soapbox now. If you still want to opt out, get an opt-out form from Inland Revenue's KiwiSaver employee information pack (which your employer should give you) or from www.kiwisaver.govt.nz or by ringing 0800 KIWISAVER (0800 549 472). Fill it out and give it to your employer or Inland Revenue.
Inland Revenue will then send you the money that has been taken out of your pay, plus interest on money already sent to the department. How long will that take? Inland Revenue is hedging its bets on the timing. ‘It will differ for each case, so it’s difficult to quantify a prescribed timeframe,’ the department says. If it is taking a ridiculous amount of time, write and tell me and I’ll address it in my column.
Your employers will refund any deductions they haven’t yet sent to Inland Revenue, but they are not required to pay interest on that money. Still, that won’t amount to much at all.
The designers of KiwiSaver took advantage of the fact that many of us mean to do all sorts of things but don’t always get around to it. If people had to go to the trouble of joining KiwiSaver, the designers figured, many of them might never do it. But if someone else puts them in the scheme, they might well stay in it. Hence the automatic enrolment when you start a new job.
Another feature – the regular deductions from employees' pay – also works well psychologically. If you had to send in money, or set up a transfer from your bank account, again you might not get around to it. What’s more, if you have money deducted from your pay before you see it, after a while you probably won’t miss it. It’s all pretty painless.
If you are a non-employee, join KiwiSaver by approaching a provider directly.
If you are an employee, you can join via your employer — by automatic enrolment when you start a new job or at any time by filling out a KS2 form and handing it to your employer. Your employer should be able to give you the form and an employee information pack, or you can download them from www.kiwisaver.govt.nz or ask Inland Revenue to send them to you by ringing 0800 KIWISAVER (0800 549 472). Your employer is not legally allowed to prevent you from joining.
At first, Inland Revenue will hold your and your employer's contributions for three months, paying you tax-paid interest on that money. That gives you time to choose a KiwiSaver provider – the company that will run your KiwiSaver account. If after three months you haven’t chosen a provider, the money plus interest will be forwarded to:
If you would prefer to be with a different provider – either during the first three months or later - you need to approach the provider directly. No provider is obliged to sign you up if you approach them directly — although most will welcome all comers, as long as you meet any minimum contribution requirements they have. But if you join via your employer, the provider must accept you even if your contributions are tiny.
- 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 nine default providers, which are AMP, ASB, ANZ, BNZ, Fisher, Grosvenor, Kiwi Wealth, Mercer and Westpac.
What if you hold more than one job? You can join KiwiSaver through any or all of the jobs you held on July 1 2007. But if you start a new job, and you are automatically enrolled in KiwiSaver and don’t opt out – or you are already in KiwiSaver - contributions will be taken from the new job and any other job you start after that. (Note, though, that a year after Inland Revenue or your provider received your first contribution, you can take a contributions holiday on one job and not another, or on all jobs, as you wish. See next section.)
KiwiTip: If you want to join KiwiSaver minimally and you hold two jobs, you could join and contribute just 3% of your pay from the lower-paying job.
When I’m 64
If you or anyone you know is 64 years old, signing up for KiwiSaver takes on special urgency. From your 65th birthday, you are no longer eligible, and you’ll miss out on Up to $2,605 of government money.
Your contributions — and stopping them
- Employed KiwiSavers contribute 3%, 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 3% when you join KiwiSaver.
- For employees who joined KiwiSaver before April 2009, 4% was the minimum in most cases. Those who wish to switch from 4% to 3% - 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 3% 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, 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 3%, 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. 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 3%, 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 3% for you?
With a calculator, multiply your weekly, fortnightly or annual before-tax pay by 0.03.
Contributing extra money
All KiwiSaver members – employees or not - can make extra payments – either lump sum or regularly – into their accounts. This money is locked in under the same rules as regular contributions.
If you do contribute extra to KiwiSaver, you won’t get employer contributions beyond 3% of your pay (unless your employer is generous and gives more than they have to). But you will get a higher tax credit if you haven’t already contributed $1,043 or more and you are over 18.
- If you are over 18, the government will contribute a 'tax credit' of $521 ($10 a week) every year, as long as you have contributed at least $1,043 during the KiwiSaver year, which runs from July 1 to June 30. If you’ve contributed less, the government will deposit 50c for every $1 you have 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. (see Tax credit timing below)
- If you are an employee over 18 and you are contributing to KiwiSaver, your employer must contribute an amount equal to 3% of your total before-tax income — unless they are contributing to another qualifying super scheme of which you are a member. Employer contributions are taxed. This means less than the 3% will end up in your KiwiSaver account.
Tax on employer contributions from April 2012
Compulsory employer contributions do not have to be paid to people under 18.
|Employee taxable income + employer contribution
||ESCT (employer superannuation contribution tax)
|0 to $16,800
|$16,801 to $57,600
|$56,801 to $84,000
For most people, the incentives end when they reach NZ Super age. But if you join KiwiSaver between 60 and 64, you can participate fully for the next five years, including receiving tax credits, first home subsidy and compulsory employer contributions throughout those five years.
- Some employers are contributing more than the required amount to their employees’ KiwiSaver accounts. This is obviously good for employees, although there are some tax ramifications.
- You can use most 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. If you buy a newly built home, these amounts are doubled, so a couple can get up to $20,000.
- 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.
Tax credit timing
Some time after June 30 each year, providers will send to Inland Revenue details of the total contributions they have received from each member over the 12 months ending June 30. This is only the money you contributed, not any employer contributions. Inland Revenue will check this with their records and pay the tax credit money to providers within 30 days. Providers then deposit the money in members' accounts.
In your first year in KiwiSaver, the maximum credit is proportionate to how much of the July-June year you have been contributing. While employees have to contribute 3%, 4% or 8% of their pay, non-employees can make a first contribution of any size and then not contribute again until the following June, if they wish.
What is your start date for calculating your first year tax credit? Inland Revenue says generally it's the earliest of:
- 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.
Some KiwiSaver providers say that if a non-employee joins KiwiSaver without making any contribution, there can be confusion over their start date. They therefore recommend making at least a small contribution at the start, even if it's just a few dollars.
Once you have worked out your start date, calculate your maximum first-year credit at $10 a week from that date to the following June 30. That will be near enough to correct.
- 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.
- 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.
- The government doesn’t guarantee you won’t lose money in KiwiSaver. But as long as you choose your provider and fund wisely, it’s highly unlikely that you will lose the money you put in, and highly likely you will end up with much more.
Some people are confused about the terminology used around KiwiSaver. I use:
- 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.
- 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. It’s also possible that KiwiSaver money could be taken from you in a divorce settlement or bankruptcy. See the next section.
Getting the money out
Generally, your money will be tied up until the age that NZ Super starts. If you are over 60 when you join, you can’t access your money for five years. For example, if you join at 63 you can't take out the money until you are 68. Once you gain access to your money in retirement, you can spend it all at once, or gradually — in whatever way you wish. The money is not taxed at that stage, it's all yours!
There are seven circumstances under which money can be taken out of your KiwiSaver account before NZ Super age:
- 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 (if you joined before 21 May 2015 and were therefore eligible for the 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. See "How bankruptcy affects KiwiSaver" below.
- 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.
- If you leave New Zealand permanently and live in any country except Australia, 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. If you move to Australia you can apply to transfer your KiwiSaver account to an Australian super scheme.
- 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 all your money except the $1,000 kick-start (if you joined before 21 May 2015 and were therefore eligible for the kick-start). For more information see http://www.tinyurl.com/firsthomenz
- 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.
- 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.
How bankruptcy affects KiwiSaver
In April 2015 the Court of Appeal ruled that if someone goes bankrupt, the Official Assignee - who administers bankruptcy – cannot take money out of the person’s KiwiSaver account to pay creditors.
This applies not only to withdrawing the money now, but also when the KiwiSaver member gains access to the money in retirement.
However, if someone makes irregular contributions into their KiwiSaver account in the run-up to bankruptcy, that money may be withdrawn and given to creditors.
Less life insurance?
Because your heirs will get your KiwiSaver money when you die, you may not need as much life insurance as before you joined the scheme. Obviously, this is not the case when your KiwiSaver account is just starting. But keep it in mind as your balance builds up to an appreciable amount.
The good news about tax
The returns on your KiwiSaver investment will in most cases be taxed at lower than normal rates, because practically all KiwiSaver funds have been set up as PIEs (portfolio investment entities).
There are several tax breaks that come with PIEs when you compare them with non-PIE investments, such as bank term deposits - in which you would pay ordinary income tax on your interest.
In the following, “taxable income” means income subject to ordinary income tax, such as wages and bank deposit interest. 'PIE income' is income earned in a KiwiSaver account or other PIE investment.
There are three steps to establishing what the tax rate should be on your PIE income:
You should note your taxable income and your PIE income in each of the last two years. If you find you are eligible for one income band in one of those years and another income band in the other year, you can use the lower PIE tax rate.
- 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 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 in both of the last two years was $48,001 or more, your PIE rate 28%.
Note that if you are in one of the two lower income bands, you are unlikely to reach the $48,000 or $70,000 threshold until the balance in your KiwiSaver or other PIE investment is at least a couple of hundred thousand dollars. For most people in KiwiSaver, this is a down-the-track issue.
Working Out Your Pie Tax Rate
0 to $14,000
$14,001 - $48,000
|Taxable income + PIE
income 0 to $48,000
|Taxable income + PIE
income $48,001 - $70,000
|Taxable income + PIE
income $70,001 +
Income Tax Rates – these apply to bank term deposit interest etc.
but not to PIE income
Where do the tax breaks come from? Most obviously, the top PIE tax rate is just 28% - compared with an income tax rate of 30 per cent on $48,001 to $70,000 and 33 per cent on income above $70,000 (see Income Tax Rates table).
|0 to $14,000
|$14,001 to $48,000
|$48,001 to $70,000
Also, if your income rises, being able to use the lower PIE rate of the last two years can make quite a difference. But there are less obvious – but often quite significant – other breaks that apply to people with taxable income of less than $48,000:
Confused? What it amounts to is this: once your KiwiSaver balance has grown to a significant amount, you will almost certainly be paying less tax on the income earned in the account than if you were in a non-PIE investment. In many cases it will be quite a lot less.
- 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%.
- 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%.
- 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%.
Further features of PIEs:
What about non-PIE KiwiSaver investments? For this book, I surveyed all KiwiSaver providers who accept the general public as members. The only one with some non-PIE investments is Craigs Investment Partners. That's because it offers a rather different investment option. In its kiwiSTART Personalised KiwiSaver scheme, investors’ choices include four Defined Portfolios, which are all PIEs, and more than 130 other securities, 19 of which are PIEs. But some of the securities don’t qualify as PIEs. If you invest in some non-PIEs through this scheme, the income on that part of your portfolio will be taxed as ordinary investment income, but it will still all happen within your KiwiSaver account. You won't have to do anything.
- 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.
Other points about tax and KiwiSaver:
- The KiwiSaver member tax credit — of up to $521 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.
- Interest paid by Inland Revenue on KiwiSaver money while it is held by the department, en route to a provider, is tax-free.
- Employees’ contributions are 3%, 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 3%, 4% or 8% of after-tax pay. For example, an employee earning $50,000 contributes 3% or $1,500. But that person’s after-tax pay is about $42,000, and $1,500 is 3.57% 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 are taxed, from April 2012. For more on this, see Incentives above.
- 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.
Two employer approaches
There are two different employer approaches to KiwiSaver:
Under the KiwiSaver Act, there must be an agreement between the employer and employees - made after 13 December 2007 - that allows the total remuneration approach. To be valid, the agreement needs to be negotiated in good faith and accepted by employees. Usually this will occur when pay increases are being offered. The agreement must also 'account for' the employer's required KiwiSaver contribution, perhaps by labeling a specific 'KiwiSaver allowance' as in the example above. Employers should take legal advice about these agreements.
- 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 4% remuneration increase in the upcoming year, but 3% 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.'
Part 2: Creative ways with KiwiSaver
The smartest ways to contribute
There are several levels of involvement in KiwiSaver.
If you don’t have a job you can do one of the following:
If you have a PAYE job you can do one of the following:
- Contribute up to $1043 a year, which will be boosted 50% by the tax credit.
- Contribute more than $1043 a year. You’ll get only the maximum $521 tax credit, so the only reason to do this is for convenience or because you want to tie up savings.
Contributing the minimum is not the smartest KiwiSaver strategy, unless you are under 18. Everyone else should try to at least put in $1,043 a year to get the maximum tax credit — in some cases even if you have to borrow to do that. And for many people there’s more to it than that.
- Sign up and contribute 3% of your pay. After you’ve been in the scheme for a year, go on contributions holidays and put in no more money ever. You’ll get a year of tax credits and employer contributions.
- While on contributions holidays, contribute up to $1043 a year. You'll get the tax credit.
- Keep contributing 3% of your pay over the years. You’ll receive ongoing tax credits and employer contributions.
- If your pay is less than $34,762 a year – which means that at 3% you will contribute less than $1,043 a year – top up your contributions to $1,043, so that you receive the maximum tax credit.
- Contribute 4% or 8% of your pay, or add extra lump sums to your KiwiSaver account. Once you’ve put in more than $1043 a year, there are no particular advantages to doing this other than for convenience or because you want to tie up savings.
The first question to ask yourself is: 'Do I have the self-discipline not to spend my retirement savings before retirement?'
Alternatively, you might want to put less into KiwiSaver, and save the rest in a separate non-KiwiSaver retirement savings scheme that still limits withdrawals. Why bother? In an emergency, it will probably be easier to get your money out of a non-KiwiSaver scheme.
- If the answer is, 'No', you might want to take advantage of the tie up of your money in KiwiSaver and put in as much as you think you will need for a comfortable retirement. If you are an employee and 8% of your pay feels right, you can contribute that through your employer. But you can put in any other amount — contributing 3%, 4% or 8% through work and/or paying lump sums directly to your provider or via Inland Revenue. Non-employees can simply contribute as much as they like to their provider.
Think hard, though, before you tie up more money than necessary anywhere. Even if you are pretty sure you won’t need the money in the meantime, you never know when extended family members or friends will become ill or in financial strife — or will offer you the chance to get in on the ground floor of their brilliant new business.
KiwiTip: If you particularly like the way your KiwiSaver fund invests, you should be able to find a similar non-KiwiSaver fund for your other savings plan — in some cases offered by the same provider – with the same tax breaks as KiwiSaver.
- If the answer is ‘Yes’, you probably regard the tie up of KiwiSaver money as a major drawback — reducing flexibility to spend or invest elsewhere. You too might want to set up two savings plans, one within KiwiSaver and the other not. But in your case the second plan should be accessible. In the KiwiSaver account, put in as little as necessary to receive all the KiwiSaver incentives. In the non-KiwiSaver investment — which might for example be shares, rental property, or a non-KiwiSaver managed fund or work super scheme — save whatever extra you need for your retirement, knowing you can get at that money at relatively short notice.
How can you get the best from the KiwiSaver portion of your savings? That depends largely on your employment status, as follows:
KiwiTip: If your maximum first-year tax credit is less than $521, you may want to contribute only up to that maximum in your first year. After your first year, as long as you contribute $1,043 before the end of June each year, you will get the full tax credit. But that’s not the only consideration. Read on.
- Employees earning less than $34,762 a year. Three per cent of your pay is less than $1,043. So if possible you should top up your contributions, either throughout the year or in a lump sum in June, so that you reach the $521 maximum tax credit. Your provider will tell you your contributions total in May or early June if you ask — although there may have to be a bit of guesswork, as they won’t know how much is still with Inland Revenue. Still, it’s no big deal if you get it slightly wrong. Note that in your first year in KiwiSaver, your maximum tax credit is likely to be less than $521, so just contribute until you reach your maximum.
- Employees earning $34,762 or more a year. You should contribute 3% of your pay for at least a year. At your pay level, that will automatically get you your maximum tax credit. After a year, you have two good options. The first is to continue to contribute 3% of pay. The second is to take a contributions holiday but keep contributing $20 a week (or $87 a month or $1043 a year) as a voluntary contribution. In its first annual report on KiwiSaver, Inland Revenue referred to this as ‘gaming the system’, but there’s nothing to stop your doing it. Either way, you’ll receive the maximum $521 tax credit. The obvious advantage of the first choice is that you will receive compulsory employer contributions — which don’t apply if you are on a contributions holiday. The disadvantage is that you’ll be tying up more of your own money.
- Non-employees — such as the self-employed, beneficiaries, people at home looking after children or early retirees. You should contribute $1,043 a year. For tax credit purposes, it doesn't matter whether you contribute $20 weekly, $87 monthly, $1,043 yearly, or sporadically through the year — assuming your provider will accept any contribution pattern. What does matter is your total contributions by June 30. However, do sign up for KiwiSaver as soon as possible, as in your first year of membership, your tax credit is proportionate to how much of the July 1–June 30 year you are a member. (For more on this, see 'Tax credit timing' above)
How often to contribute?
Most employees, of course, contribute every payday. Non-employees — and employees on contributions holidays who continue to put in up to $1,043 a year — can simply make a one-off contribution any time during the year. Many will do it in June. But that’s probably not your best option.
If you are investing in a KiwiSaver fund that includes some shares or property — which means your balance will fluctuate with market fluctuations — there's a really good argument for contributing a regular amount weekly or monthly. It is called "dollar cost averaging" - if you contribute the same amount regularly to an investment you will end up buying more when prices are low and less when prices are high.
Despite this, some people think they are better off just making a one-off contribution every June, because they can invest the money elsewhere in the meantime. They forget that if they drip-feed contributions into KiwiSaver they are earning the KiwiSaver fund returns on that money, which might be more than they earn elsewhere. Even it that’s not the case, it's unlikely the difference will be big enough to counter the advantages of dollar cost averaging.
In the end, the decision might come down to budgeting issues. Some will find it easier to contribute gradually. Others, who are unsure if they can spare the money each year, might prefer to wait until June to see how the land lies. If you are in the latter group and you have a bad year, just contribute as much as you can spare. Remember, every dollar up to $1,043 a year is boosted by the member tax credit.
KiwiTip: If you do wait until June to contribute, I suggest you do it in early June. Your total, for tax credit purposes, will be noted at the end of June, but it may take your provider a while to process your contribution.
Financial experts often say there is no point in tying up more money in KiwiSaver than is needed to receive all the incentives. By all means save more, they say, but do it in a more accessible way. However, some people are happy to 'over-contribute' to the scheme – and it's not always because they would otherwise spend the money. Other reasons for putting in extra include:
- You like the 'painlessness' and simplicity of regularly contributing to KiwiSaver.
- You don’t want to go to the hassle of selecting and setting up an alternative savings plan.
- The fees and/or taxes are lower than on alternative savings plans that appeal to you.
- You prefer to keep your savings simple, all in one account.
- You already have enough investments that are not locked up to meet any pre-retirement needs.
How to make extra contributions
Anyone can always put extra into a KiwiSaver account. There are two ways to do it. The more direct way is by sending it to the provider. All providers will accept regular contributions — perhaps as transfers from your bank account if that suits you — and most will also accept one-off payments. Ring or email your provider and ask how to do this. It should be straight-forward.
The other way is via Inland Revenue, in the same way as if you were paying tax – except that the money will still be yours! You can deposit the money over the counter at a Westpac bank, or send in a cheque with your IRD number on the back and a letter saying the money is for your KiwiSaver account, or you can use internet banking. On the internet, use the 'pay tax' option, put ‘KSS’ for the tax type, and zero for the period.
Non-employees can get first year over and done with
KiwiSaver is more flexible for non-employees than employees. In most cases, employees have to contribute at least 3% of their before-tax pay for a year before they can take a contributions holiday, whereas non-employees can contribute any amount, including zero, as long as their provider accepts that.
If you are not employed but there’s a chance you will later become employed, and you think that when you start a job you might not want to contribute 3% of your pay, join KiwiSaver now. When you start a job, your employer should ask if you are already in KiwiSaver. When you tell them you are, they will take 3% out of your pay. But if you have already been in KiwiSaver for 12 months or more, you can apply to take a contributions holiday, and your contributions will stop shortly afterwards. You can even apply before the job starts and avoid making contributions even for a short time.
Assisting family or friends
Many New Zealanders, including some over 65 who are not eligible to join KiwiSaver, want to help their families or friends to get into the scheme. Some older people might even see it as justification for doing more 'SKI-ing' — spending the kid'’ inheritance. If you help the kids save, they'll need less money from you after you die!
There's nothing to stop anyone from contributing to someone else’s KiwiSaver account, and it can be really worthwhile. However, sometimes it will be better to contribute for a family member in other ways. Consider these issues:
- Because children under 18 don’t get tax credits, they don’t gain anything extra from money going into KiwiSaver compared with another savings fund. And the downside with KiwiSaver is that the money is tied up, generally until they buy a first home or reach NZ Super age. If, instead, you contribute to another savings plan for them, they could use that money for tertiary education or to start a business. However, they could also squander it on good times!
- If your relative or friend is a non-employee over 18, it’s a great idea to help them contribute to KiwiSaver until their total contributions equal $1,043 a year, so they get the maximum tax credit. Beyond that, though, the money will be tied up with no extra KiwiSaver gain — unless you want to tie it up to be sure they use the money for a first home or retirement.
- Employees over 18 who earn less than $34,762 and contribute 3% of their pay will be putting in less than $1,043. But you could put in more, to get them to that total so they can receive the maximum tax credit. Again, beyond that, the money is tied up for no special gain.
- Employees over 18 on all income levels have to contribute 3% of their pay for at least a year. Even after the first year is over, in most cases they will benefit a lot by continuing to put in 3%. While you can’t directly contribute on their behalf — because their contributions come out of their pay cheque — you can replace some of that money with cash if they are struggling to make ends meet.
Part 3: Did you realise?
There's a lot of misinformation about KiwiSaver. Here are some key points to understand.
- All non-employees, including beneficiaries and the self-employed, can afford KiwiSaver. They can join and put in tiny amounts and receive the tax credit.
- Almost all employees can afford it. While most have to put in 3% of their pay for a year, after that they can stop all contributions. And 3% is pretty small.
- The KiwiSaver incentives sometimes double your money or more — hugely boosting your returns.
- Not all KiwiSaver account balances are volatile. In very conservative accounts your balance is almost certain to always grow, never fall – like a savings account.
- You don’t have to pay tax to get the so-called tax credit. It's given to all KiwiSavers aged 18 to 64.
- Many KiwiSaver investors will pay lower tax than they would on most other investments.
- If you don’t normally file a tax return, that won’t change because of KiwiSaver. Tax is taken care of in the KiwiSaver scheme.
- For each month you delay joining, you miss out on $43 of government money.
- Over the long term, mucking around for a couple of years before you join means you miss out on heaps in retirement.
- KiwiSaver is more flexible than many realise, allowing you to vary your contributions, and to invest in a wide range of assets, including property.
- Non-employees can stop contributing at any time, and employees can stop after a year, with no questions asked – or earlier if they are in financial difficulties.
- If you stop working, you can stop contributing to KiwiSaver straight away.
- While on a contributions holiday, you can still put in any amount you choose, including $1,043 a year to maximise the tax credit.
- KiwiSaver schemes are not like finance companies. Take the advice in this book, and there is very little chance you will lose the money you put in.
- Drip feeding into KiwiSaver makes it pretty painless – and also happens to be the best and least worrying way to save.
- When you die — before or after retirement age — your KiwiSaver money is paid to your estate, available for your heirs to spend.
- Distrust of the government is no reason not to join. There is nothing a government is at all likely to do that would make you wish you hadn’t joined KiwiSaver.
- Other reasons for not joining hardly ever hold up to scrutiny.