This article was published on 31 May 2005. Some information may be out of date.

How KiwiSaver will work for you

How you might react to the KiwiSaver programme in the recent budget depends on your circumstances.

Under the programme, scheduled to start in April 2007, employed people, the self-employed or beneficiaries can contribute 4 or 8 per cent of their income to a saving fund.

The government will make a one-off $1,000 contribution when you sign up, and will contribute to management expenses.

Generally, the money is locked in until you become eligible for NZ Super, currently at 65, or five years after you join, whichever is later.

You can take out your money earlier if you permanently move overseas; suffer financial hardship; or — after three years membership — if you buy a home.

Home buyers will receive $1,000 for every year in the scheme, up to $5,000, towards the deposit. If the family includes two KiwiSavers, they can each receive up to $5,000.

Here’s how you might take advantage of the scheme, depending on your circumstances:

Too poor to buy a home.

Your aim might be to get the $1,000 government contribution while putting in as little as possible.

You will have to save 4 per cent of your income for three months. But after that, you can take a “contribution holiday” for five years, and repeat that every five years if you wish.

If you take a new job, you will be automatically enrolled again, but you can opt out after a couple of weeks.

If 4 per cent of your income seems unmanageably high, save up just half of one per cent of your income for two years before you join. That should give you enough to make the payments for three months.

Saving for a first home.

We’ll assume you have neither a high income (the cutoff is likely to be $100,000 for couples) nor plans to buy an expensive home (the maximum price is not yet set.) Either of these would make you ineligible for the deposit assistance.

If you can wait five to seven years before buying, you’ll get $3,000 to $5,000, or double that for couples.

The original $1,000 can’t go into the house. It will stay in the savings scheme. But you will be able to divert future scheme savings into repaying your mortgage.

Homeowner with a mortgage.

It will probably be better to put your savings into repaying your mortgage fast, rather than using KiwiSaver. And if you have credit card or other high-interest debt, definitely repay that first.

But, like “too poor” people above, you might as well get the $1,000 by contributing for three months and then taking contribution holidays.

There is, however, an argument for continuing to contribute, say, $100 a month — if the scheme suits you. You diversify your savings, and learn about financial markets.

Homeowner with a mortgage and an employer who subsidies KiwiSaver savings.

As long as the subsidy is at least 50c for every dollar you put in, you will probably be better off saving through KiwiSaver than repaying your mortgage or saving any other way. A subsidy makes a big difference.

Owner of a mortgage-free home, or someone who prefers renting, or someone saving for a home who is ineligible for housing deposit assistance.

Repay high-interest debt first. Once you’ve done that, KiwiSaver may work for you. It will be worth being a member for at least three months, to get the $1,000 government contribution.

Whether you should then continue or take repeated contribution holidays and save elsewhere depends on whether the savings options — yet to be announced — suit you.

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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.