Good fairy turbocharges lower income people’s savings
You’re struggling on a low income, as a part-time or full-time worker. All this talk about saving is fine for those making plenty, but you feel you can’t spare anything. Fair enough.
Enter the Good Fairy. “How about a deal?” she says. “If you can set aside just a few dollars a week, I will multiply your savings five-fold, eight-fold, thirteen-fold — the lower your income the more I will boost your savings. It will really help you get ahead in the long term. Interested?”
While not everyone sees the government as a Good Fairy, the fact is that when the KiwiSaver minimum employee contribution drops from 4 per cent to 2 per cent on April 1, lower income people will see their savings boosted hugely in their first year in the scheme.
After the first year, it’s not quite so good. The savings for people earning less than $52,150 a year will be “merely” tripled. But that’s still great. Three times as much going in means three times as much in savings at the other end. Where you might have saved $30,000, you will save $90,000. Where you might have saved half a million dollars over many years, you will save one and a half million.
Nevertheless, you might feel reluctant to commit to saving for many years. And you don’t have to. After your first 12 months in KiwiSaver you can take a contributions holiday for five years, and then keep renewing the holiday until retirement, if you wish.
So it’s silly not get in, at least for the first year, when the KiwiSaver ‘multiplier’ is extraordinarily powerful. Here’s how it will work after April 1:
- If you earn $5,000, you contribute 2 per cent, or $100 a year — less than $2 a week. Your employer contributes the same 2 per cent, or $100. And the government puts in the $1,000 kick-start as well as matching your contribution with a $100 tax credit. Total contributions are $1,300 — or thirteen times the $100 you contributed.
- If you earn $10,000, you contribute $200 a year — less than $4 a week. Your employer also contributes $200, and the government puts in $1,000 plus a $200 tax credit. Total contributions are $1,600 — or eight times your $100.
- As your income rises, the multiplier reduces. But at $50,000 it’s still pretty good. You contribute $1,000 a year — less than $20 a week. Your employer also contributes $1,000, and the government puts in the $1,000 kick-start plus another $1,000 tax credit. Total contributions are $4,000 — or four times your $1,000.
What about higher-income earners and non-employees?
Someone earning $80,000 contributes $1,600, their employer matches that, and the government puts in the $1,000 kick-start and the maximum tax credit of $1,043. Total inputs are $5,243, or nearly 3.3 times the employee’s contribution.
Even at $200,000, the employee contributes $4,000, their employer matches that, and the government puts in $2,043. Total inputs are $10,043, or more than 2.5 times the employee’s contribution.
No matter how high the income, an employee’s money will always be considerably more than doubled in the first year — and somewhat more than doubled in every subsequent year.
Non-employees — including the self-employed, beneficiaries and others not in the work force — can join KiwiSaver, get the kick-start and contribute nothing, which is a fantastic deal. Several providers will accept this.
However, it’s better still if they put in up to $87 a month or $1,043 a year, giving them a matching tax credit. In their first year their money will be almost tripled because of the $1,000 kick-start. After that, it will be doubled — still well worth getting.
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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.