KiwiSaver more flexible and generous than commonly thought
Two lesser known features of KiwiSaver make it more user friendly than many people realise. They could entice non-joiners into taking part in a scheme which — after all — they are helping to fund, as taxpayers.
The first is about employer contributions while a KiwiSaver member is on a contributions holiday.
As you probably know, non-employees can stop contributing to KiwiSaver whenever they like, but employees must contribute for at least a year — unless they strike financial difficulties.
After a year, an employee can take a contributions holiday — for anything from three months to five years — by filling out a simple form. If they wish, they can renew their holidays all the way to retirement.
While an employee is on holiday, they can contribute nothing or any amount they choose, directly to their provider. I recommend trying to put in up to $1,043 a year, as that will be matched dollar for dollar by the government’s tax credit.
Employers don’t have to contribute to “holidaying” employees, but they can if they wish. What’s more, the government will still fully reimburse them for contributions of up to $20 a week. So they might as well do it.
Unlike the usual situation, employer contributions will be taxed because the employee is not contributing via work. But the employee will still get the after-tax amount — something for nothing.
Furthermore, this applies to any and all jobs, including small part-time jobs. To take an extreme case, it’s possible for an employee on a contributions holiday, who holds three jobs, to have three employers putting $20 a week each into their KiwiSaver account. This will all reimbursed by the government.
The second feature goes a long way towards helping out employees who are reluctant to tie up 4 per cent of their pay and those who say they can’t afford to — even though it’s only for a year.
If that sounds like you, talk to your boss about setting up a “two plus two” plan.
This allows employees to contribute just 2 per cent of pay until April 2010, rising to 3 per cent for the following year and 4 per cent from April 2011 on. What’s more, you could do 2 per cent for just 12 months and then take a contributions holiday.
At the same time, your employer must also contribute at the same rate — 2 per cent rising to 4 per cent.
For the employer, the only difference between the two plus two schedule and the normal employer contribution schedule is that the employer has to put in 2 per cent instead of 1 per cent until April 2009 — which is only seven months or so. And in any case, the difference will cost many employers little or nothing.
That’s because, as noted above, the government reimburses employer contributions up to $20 a week. And 2 per cent is less than $20 a week for any employee earning less than $52,150 a year.
Even for employees earning more than that, the employer’s cost will be partly reimbursed. For example, an employer who contributes 2 per cent to someone earning $75,000 will be reimbursed all but $457 per year, and the $457 is tax deductible.
If, as an employee, you anticipate some reluctance from your employer to go along with either of these ideas, you might want to try a little negotiating. Perhaps you would accept a somewhat smaller pay rise in exchange for the employer’s co-operation.
Given all the extra money in it for you in your retirement, it could we well worth a bit of sacrifice now.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. 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.