By Simon O’Neill
Simon explores the impact of KiwiSaver over the past 12 years and how you can maximise its effectiveness for your financial goals.
Monday 2 July 2007 was a game changer.
This was the day that the New Zealand government introduced a savings/retirement scheme that would help secure our financial future: KiwiSaver.
Part of that financial future, as is the “Kiwi dream”, is owning your own home. One of the great things about KiwiSaver, is you can withdraw almost all of it and use it toward your first home. The fact that not only does your employer contribute a portion but also there’s “free money” every year from the government by way of the Member Tax Credits to further build this fund, is fantastic!
When you combine your KiwiSaver balance with your other savings, the Home Start Grant, and maybe a gift from the bank of Mum and Dad, your deposit can start to look pretty healthy. In many cases, without KiwiSaver (and Home Start Grant, where applicable) a lot of Kiwi’s would not even get a look in to the housing market.
After all that hard work, years of contributing and you finally get the house. Congratulations!
Yes, the savings are depleted, and it can be a bit disheartening to see all that money gone. It does take an emotional toll and I remember feeling (when we got our home and used up all our KiwiSaver balances) that those funds were setting me up for retirement and now we’re back to $1000. Eeek!
As you find your feet in your new home and you promise to half those takeaway coffees and go to the vege markets rain or shine every Sunday, it’s important to remember there is still plenty of time to rebuild that nest egg.
The next time you can withdraw from your KiwiSaver is at retirement (although there are some other qualifying circumstances). So, between now and then, I’m assuming you’re with me on this one, you’re wanting to ensure that that balance gets as big as possible.
In Australia, your employer contributes 9.5% on top of your annual salary to your super account and you can make voluntary contributions as well. In Canada, you can choose to contribute up to 18% of your pre-tax annual earned income, up to a maximum of about $25,000 per year. In the UK, you receive tax relief on contributions up to 100% of your earnings capped at a whopping £40,000 annually.
Here in God’s Own, you now have several options for contributing percentages: 3, 4, 6, 8 or 10%. Your employer will still do the 3% and if your contributions exceed $1042 per KiwiSaver calendar year you’ll continue to get the Member Tax Credits (free money) from the government.
So, now is the time to crank it up.
Did you even notice 3% coming out of your pay? What about if you made it 6% for a year? Or 10%?
Yes, the fund/s that you invest in have a part to play, but so does the contribution you make. You might raise an eyebrow or two when you punch the figures into a KiwiSaver calculator and see the differences in your “retirement” balance between contributing 3% and 8%.
As an example, let’s say you’re a 40-year-old PAYE employee on $55k with a KiwiSaver balance of $1k and next time you’ll be taking the KiwiSaver out is at age 65. 3% from you (and 3% from your boss) in the ‘Growth’ fund is approx. $254k at retirement. Increasing your contribution to 8% is approx. $468k at retirement.
Key factors to maximising that balance are, the fund/s you’re investing in (get out of the default fund!), the contribution rate you have and the tax rate you have loaded against your KiwiSaver.
A recent Stuff article referenced a 2015 KiwiSaver warning about Kiwis on the wrong (KiwiSaver) tax rate. It really was spectacularly correct. Nearly half a million Kiwis have overpaid tax, in the millions. And no, IRD won’t refund.
Now is the time to re-look at the set-up of your KiwiSaver, check your tax rate, check the fund/s are appropriate for you, and ask yourself whether a change in contributions might be a wise step.
We can help guide you through each of these decisions. As always, we’d love to chat!
Simon O’Neill is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.