NZ Herald 7 June 2008

AIndeed it is. And I can suggest something even better than that. But let’s take this one step at a time.

Many people can immediately triple the money they put into KiwiSaver. And three times as much going in means three times as much earning returns over the years and three times as much coming out the other end.

Retirement savings that might otherwise have totalled $50,000 will total $150,000. If they might otherwise have totalled $500,000, they will total $1.5 million.

Other KiwiSavers will double their money. Some will quadruple it. It’s all good stuff. That’s why I keep raving about the scheme.

The situations for different people are:

• Most employees who earn $26,000 or less will always more than double their money — with the tax credit matching their contribution and the employer adding more. From April 2011 — when employer contributions reach the maximum 4 per cent — they will triple their money. And if they divert half their contributions via mortgage diversion they will quadruple their money. More on this last bit in a minute.
• Most employees on more than $26,000 will see their contributions boosted considerably — although for those on high incomes it won’t be hugely at first. Still, from April 2011 pretty much all employees’ money will be more than doubled. What’s more, if they use mortgage diversion, their money will be more than tripled.
• People like you — employees who take a contributions holiday but keep putting in $1,043 a year, and have an obliging boss — will triple their money. While employers don’t have to contribute to employees on contributions holidays, the government will reimburse them up to $1,043 a year if they do contribute. So it won’t cost them anything — except administration costs.
• If the boss is not obliging, employees on contributions holidays who put in $1,043 a year will double their money — from the matching tax credit.
• The exceptions are employees whose pay rises are reduced by the amount of their employers’ KiwiSaver contributions, or whose employers are exempt from contributing to KiwiSaver because they are giving to the employees in a non-KiwiSaver scheme. Those employees’ contributions are effectively boosted only by the tax credit. The impact of that varies according to their pay level.
• Non-employees who put in $1,043 a year or less will have their contribution matched by the tax credit, so their money will be doubled.

So what’s mortgage diversion? After you’ve been in KiwiSaver for a year, you can arrange to have up to half your contributions diverted into paying off the mortgage on your “principal residence” — in other words not a bach or rental property.

While most of the big banks say at this stage that they won’t accept diverted money as part of your regular required mortgage payments, almost all will let you divert KiwiSaver money towards extra payments of your mortgage,

There’s a downside to mortgage diversion for people earning less than $52,000. Their 4 per cent KiwiSaver contribution is less than $2086, so if they divert half, that will leave less than $1,043 in the KiwiSaver account. That means their matching tax credit will be less than the maximum $1,043.

Nonetheless, in most circumstances they will still be better off using mortgage diversion. Calculations show that the only ones who shouldn’t bother are people earning less than $26,000 who are either over 55 or 35–55 and investing in riskier KiwiSaver funds. Even they should still use mortgage diversion if that’s the only way they can afford KiwiSaver, and they are lucky enough to have a lender who will accept putting the money towards regular mortgage payments.

For bigger earners like you, mortgage diversion is a great idea. Let’s say you earn $125,000. Your $5,000 contribution will be halved to $2,500, with the rest going into your mortgage. Your employer will still put in $5,000 and the $1,043 tax credit will bring the total to $8,543. That’s 3.4 times what you put in.

If your mortgage lender will let you put the diverted money towards your regular payments, that will ease up your finances. Even if that’s not allowed, you’ll be knocking back the mortgage total, which will be great for you in the long run.

And note that you’ll get nearly $4,000 more from your employer than in your plan. That’s worth a bit of sacrifice to get, surely.

I should add that all of this assumes KiwiSaver incentives remain as they are now. If the Government changes after the election, anything could happen, although the National Party has said it doesn’t plan to make major changes to KiwiSaver.

And don’t forget that if any future government makes KiwiSaver less attractive, you can always stop your involvement by taking a contributions holiday after a year in the scheme. Or, if you are a non-employee, you just stop contributing whenever you like.

AShe certainly can. More on how in a minute. But first, let’s explain the situation to others. Now is the time for everyone in KiwiSaver to make sure they get the biggest possible tax credit for their first year in the scheme. If you need to take action, it has to be in the next couple of weeks.

That’s because your tax credit will be calculated on how much you — not your employer or the government, just you — have put into the account in the year ending June 30. And if you wait until late June to top up your account, it’s always possible that your contribution won’t be processed in time.

Most people won’t be eligible for the full $1,043 tax credit in their first year, as it is proportionate to how much of the July 1-June 30 year you were in the scheme. Your start date for the credit is the earliest of:

• The date the account was opened.
• 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. The inclusion of Inland Revenue here would apply if you sent money directly to the department, which anyone can do if they wish.

Note that there is an exception to the above rules for any employee or non-employee who joined KiwiSaver directly through a provider before October 1, 2007. For them, the start date is the first of the month in which they signed up for KiwiSaver — even if they didn’t make any contribution for a while — as long as they made their first contribution by October 31, 2007.

The maximum tax credit for everyone is $20 a week from your start date to June 30. But it’s important to realise that you will get that amount only if you have put in at least as much yourself by June 30.

If you are an employee earning more than $26,075 a year, your 4 per cent contributions will be enough.

For employees on less than $26,075 and all non-employees, your provider should be able to tell you your total contributions if you haven’t kept track of them. But if you are an employee, some of your contributions will still be with Inland Revenue, en route to your provider.

You’ll just have to estimate that amount. But don’t fret too much about it. If you end up putting in too little, that simply means your tax credit will be a bit smaller. But if I were you, I would err on the side of putting in too much. After all, it’s still your money in your KiwiSaver account.

And so to our correspondent’s question, on making extra contributions. Anyone can put extra money into their own — or their relative’s or anyone else’s — KiwiSaver account whenever they want to.

The most straightforward way is to send it directly to the provider. Ring or email to ask how to go about that. Alternatively, you can pay it to Inland Revenue, either at a branch of Westpac bank or by mailing a cheque with your IRD number on the back and a letter saying the money is for your KiwiSaver account. Or you can do it by internet banking, using the “pay tax” option. Put “KSS” for the tax type, and zero for the period.

Footnote: Anyone who has struggled to work out their maximum first-year tax credit will be relieved to know that in all subsequent years the maximum is $1,043. But this applies to your first year, not the scheme’s first year. Anyone who joins KiwiSaver after July 1 will have to make the same calculation for their first year in the scheme.