A big year for KiwiSaver
In the annals of KiwiSaver history, 2012 will be notable for two things. It will mark the start of a two-year shift away from government input and towards more employee and employer input, and it will be the first year in which members can withdraw their savings in retirement.
While there have been minor reductions in government support in the past — including the cancellation of the $40 annual fee subsidy — the changes this and next year are more significant.
Some people view these changes as a disappointment, but others say they are fairer to people who, for whatever reason, don’t belong to KiwiSaver, because less taxpayer money will go into the scheme. After all, close to half the money that goes into KiwiSaver currently comes from the government. Of course the changes will also help the government’s Budget.
There are three steps in the process towards less government participation and more employer and employee participation:
The introduction, from April 1 this year, of tax on employer contributions.
Up until now, when employers contributed 2 per cent of their employees’ pay, that money was untaxed — although if the employer put in more, the extra was taxed. From April, the whole lot will be subject to what’s called the employer superannuation contribution tax.
That tax is calculated on your taxable income plus your employer’s contribution, and ranges from 10.5 per cent to 33 per cent (see table). For most people, the tax rate will be the same as their income tax rate.
For those on lower incomes, the new taxation won’t make much difference, but people on higher incomes will see considerably smaller employer contributions.
Halving of the tax credit.
This will be noticeable around July and August, when providers put annual tax credits into KiwiSaver accounts. In the past, if you contributed $1043 or more you received $1043, and if you contributed less than that your tax credit matched your contribution total.
From this year, though, the tax credit will be halved, to 50c for every dollar you contribute with a maximum tax credit of $521.
The change shouldn’t affect KiwiSaver members’ behaviour. It still pays to get at least $1043 into your account by June 30 to get as much as you can from the government.
For employees who earn more than $34,762, this will automatically happen, as 2 per cent of their pay is more than $1043. But anyone earning less than that, and all non-employees, will benefit from contributing directly to their provider whatever it takes to reach the $1043 total. A 50 per cent subsidy is still well worth getting.
Increase in employee and employer contributions.
From April 1 2013, the minimum employee and employer contributions will rise from 2 to 3 per cent of pay.
Many employees will welcome this change. They will manage the increase in their input, and welcome the extra contribution from the boss. But some may struggle and have to take a contributions holiday.
Any employee who has been reluctant to join KiwiSaver because they feel they can’t afford it might want to bite the bullet now and join while their minimum contribution is only 2 per cent of pay. It will be harder once the rate rises to 3 per cent.
They will have to contribute for at least 12 months — unless they get into financial difficulties — but after a year they can take contributions holidays for as long as they want to. Mind you, once they are used to a year of 2 per cent contributions, many will probably manage the transition to 3 per cent.
The other 2012 development is that, from July 1, people who joined KiwiSaver on the very first day, July 1 2007, and who are 65 or older will be able to withdraw their KiwiSaver money. And from then on, anyone who has been in KiwiSaver at least five years and has reached NZ Super age — currently 65 — can take their money out.
The first thing they should realise is that they don’t have to do anything. Tax credits will stop, and so will compulsory employer contributions, but they can leave the money in their KiwiSaver account, earning returns, for as long as they wish. They can also make further contributions.
People in this situation should treat their KiwiSaver money like any other retirement savings. If they have debt, pay that off. Otherwise, perhaps use some for travel or other projects and using the rest to supplement their other income for day-to-day needs.
One more probable KiwiSaver landmark for 2012: If membership growth continues at the current pace, the two millionth person will join some time around August.
Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd FSCL, a seminar presenter and a bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.