Winning the KiwiSaver game under the new rules
As the dust settles on the government’s Budget announcements about KiwiSaver, how should the changes affect the way you play the KiwiSaver game?
In case you’ve missed or misunderstood them, here are the changes affecting individuals:
- From this July 1, the tax credit decreases from $1 for every $1 you contribute up to $1043 a year, to 50c for every dollar you contribute up to $1043. So the tax credit maximum drops to $521 — rounded to the nearest dollar.
- From 1 April 2012, employer contributions will no longer be tax exempt — reducing the amount going into your KiwiSaver account.
- From 1 April 2013, minimum employee and employer contributions will rise to 3 per cent of pay.
Regardless of how you feel about the changes, you’re almost certainly still better off in KiwiSaver than out. If you are under 65 and haven’t joined, do — to at least get the $1000 kick-start. If you are an employee, your commitment is just to contribute for one year. For non-employees — including the self employed — there is no commitment.
Unsure if you can afford KiwiSaver? Try to join before April next year, so you can do your first year of contributions at 2 per cent of pay — before that rises to 3 per cent. After the first year, you can take contributions holidays if you must. But, if you plan to save the extra 1 per cent of pay, you might manage it. It’s not much.
KiwiSaver is still clearly a great way to save for a first home — as long as you can wait at least three years before buying. There are advantages to saving within KiwiSaver even if you earn a high income and plan to buy an expensive home — and still more advantages for others. See www.hnzc.co.nz/kiwisaver for the rules.
What about KiwiSavers who already have a home? Should you keep contributing?
For non-employees, it’s clear-cut. Continue to contribute $1043 a year to get the maximum tax credit. Even though the tax credit will be halved, it will still boost savings considerably each year, making it hard for other investments to compete.
There are rare circumstances in which it might be better for a non-employed KiwiSaver to put the $1043 into repaying a mortgage for a period. But the gain over continuing to contribute to KiwiSaver is small. It’s not worth worrying about.
For employees, ask yourself whether your employer reduces your pay rises by the amount they contribute to your KiwiSaver account. We’re not talking about lower pay rises across the board because of KiwiSaver, but specifically your pay rises.
If the answer is no, you are better off continuing to contribute to KiwiSaver.
If the answer is yes, you are effectively paying your own employer contributions. So from April 2013 you will save 6 per cent of your pay — 3 per cent from you and 3 per cent ostensibly from your employer. Of course you still get the tax credit.
Nothing wrong with that — unless you don’t want to tie up that much money until retirement. In that case, you might prefer to take a contributions holiday.
You should still contribute $1043 a year directly to the provider, to receive the maximum tax credit. But save the rest of your old KiwiSaver contribution somewhere accessible, or use it to repay your mortgage or other debt.
Because your employer is no longer contributing to your KiwiSaver account, they should give you higher take-home pay. If you want to end up with as much in retirement, you need to add that extra money to your mortgage repayment or non-KiwiSaver savings.
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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.