NZ Herald 13 April 2019

AYes. And we’ll look more at your specific situation in a minute.

But first, here’s a message for everyone aged 60 to 64 who isn’t in KiwiSaver. Join before July 1 and you’ll get up to $2605 from the government — plus employer contributions if you are an employee. Muck around and you’ll get less.

Readers who know people in this situation might want to alert them, as I haven’t seen this pointed out by anyone else.

There are some Ts and Cs, of course. But let’s start with the basics. From July 1, two KiwiSaver changes take effect:

• People over 65 can join KiwiSaver. They won’t get any tax credits, now called government contributions. And there won’t be any compulsory employer contributions — although the government says 80 per cent of employers currently contribute to employees over 65, so I suppose most employers will also contribute to new joiners.

I strongly suggest 65-plus people consider joining KiwiSaver as a place to park some of your retirement savings. There’s a wide range of investments, lots of info about them, and generally lower fees than in non-KiwiSaver funds.

• The five-year lock-in for people who join KiwiSaver between 60 and 64 ends.

Until July 1, the savings of anyone who joins in that age group are locked up until you have been in the scheme for five years — even though you will have reached 65 in the meantime.

But the good part is that throughout those five years you get compulsory employer contributions and the government contributions — 50 cents for every dollar you pit on, up to $521 if you contribute $1042 or more. For example, if you join at 64, you get those contributions until you’re 69.

When the lock-in ends, from July 1, the five years of contributions end too. People in their early sixties who join after that date will see the contributions stop at 65, just as they do for everyone else.

What it all means:

• A person who is turning 62 and joins now can get up to $2605 — five years of $521 — from the government. But if they join after July 1 they get only three years’ worth, up to $1563.
• A person who is about to turn 65 and joins now can also get up to $2605. But if they join after July 1 they get no government contributions.
• For employees who join now there will also be more years of compulsory employer contributions.
• You will, of course, have to contribute to KiwiSaver to get the money. For employees it will be 3 per cent of pay for at least a year, but after that you can take a contributions holiday, now called a savings suspension, if you wish. Non-employees and employees on a savings suspension should contribute $20 a week or $87 a month or $1042 a year to get the full $521 from the government. It’s best to set up an automatic transfer from your bank account.

What if your circumstances change? It’s worth raiding your savings to keep contributing. If you can’t afford even that, you can put in nothing — but you miss the benefits.

Also, the lock-in of your money has been softened. In a little publicized change, the government has said that from April 2020 anyone in a five-year lock-in will have the option of gaining access to their money at any time after they turn 65. If you take up that option, you lose the government contributions and compulsory employer contributions from that date. But it gives you flexibility if, for example, you decide to retire earlier than you had planned.

Okay, now turning to our reader. You can be in KiwiSaver as well as your other scheme, but your employer won’t contribute to both.

In your first year you’ll have to put at least 3 per cent of your pay into KiwiSaver — in addition to your contributions to the other scheme — and you’ll get the KiwiSaver government contribution.

If that proves too hard, after your first year you can take a savings suspension. The maximum suspension period is now one year instead of five years, but you can easily renew it every year. While you’re on the suspension, you’re like the people in the fourth bullet above. Try to put in $1042 a year.

Unsure which fund to join? Use the KiwiSaver Fund Finder on sorted.org.nz. Firstly, find the right type of fund for you. Then compare all funds of that type. I suggest you go for the ones with the lowest fees.

AThis is the same principle as the recent letter about putting $75 a week into each child’s KiwiSaver account versus putting the lot into one parent’s account. I’ve received a few letters about this, so let’s try to make it clear.

It doesn’t make any difference to your total savings whether you put it all in one account or spread the money around. Each dollar earns the same return, regardless of whether it’s joined by lots of other dollars or only a few.

To show this, we’ll do a few sums. Those who find this a bit much of a challenge on a Saturday morning can skip to the end!

Let’s say you each have a balance of $1000, you each contribute $100 a year, and the return is 10 per cent, paid at the end of each year.

Scenario 1: You each keep contributing to your own account.

Each balance will be $1100 at the end of the first year, plus a return of $110, which comes to $1210. At the end of the second year it will be $1310 plus a return of $131, which comes to $1441. At the end of the third year it will be $1541 plus a return of $154.10, which comes to $1695.10. Multiply by two for your two accounts, and you have $3390.20.

Scenario 2: You leave one account at $1000, and make all contributions to the other.

The first account will earn a return of $100 in the first year, so it will total $1100. In the second year it will grow to $1210, and in the third year it will grow to $1331.

Meanwhile, the second account will grow to $1200 at the end of the first year, plus a return of $120, which comes to $1320. At the end of the second year it will be $1520 plus a return of $152, which comes to $1672. At the end of the third year it will be $1872 plus a return of $187.20, which comes to $2059.20.

The total for the two accounts is $3390.20 — the same as in the first scenario. And that will continue to apply for as many years as you like.

AThanks. Yes, a lower tax rate can make quite a difference over the years.

AThe KiwiSaver balances of both children and adults may fall in years when markets fall. But it’s true that a child’s balance is more likely to decrease because, as you say, they don’t get the government contribution. What’s more, many are making no or only small contributions of their own.

It’s also true that children pay tax, albeit at a lower rate as noted above.

However, you’re not quite right about fees.

Most providers charge kids the same as their parents. And most fees include a fixed charge, which hits people with low balances harder. A $30 fee dents a $500 balance much more than a $50,000 balance.

But there are exceptions. The Commission for Financial Capability reports that, as of last October:

• Juno charges no fees for under 18s.
• Craigs and Simplicity waive the annual admin fee, so they charge just a percentage, which will be low on a small balance.
• NZ Funds also waives the admin fee, as long as contributions total $200 or more.
• Aon slightly reduces their annual fee for under 18s.

These providers no doubt hope to keep child members when they grow up, and fair enough too — although of course everyone is free to change provider whenever they want to.

All in all, KiwiSaver isn’t as good for children since the $1000 kickstart ceased. Still, I think it’s worthwhile to sign up your kids in a fund that charges low fees either for children or for everyone.

Once they get a job — perhaps part-time — they will make contributions, and that can set up a lifetime habit. Meanwhile, they are learning about how markets work.

AYour understanding is correct.

But I thought the correspondent was just pointing out how much his property value has grown in the past, and adding that if you owned a property for many years in the future, there would be a similar big gain.

Anyway, in case others were confused, the proposed CGT would be only on gains since 2021 — or whenever the tax starts, if it does start at all.