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July 07 newsletter

Should you invest in a KiwiSaver scheme? Yes

Last November, we provided an initial overview of KiwiSaver. This month’s newsletter provides an update, taking into account the significant enticements added in the recent budget.

Why should you invest in a KiwiSaver scheme?

The government has included a number of benefits which now make signing up for KiwiSaver a very worthwhile addition to your personal financial planning strategy. The benefits:

• An initial $1,000 to kick start your KiwiSaver scheme.
• From 1 April 2008, employers are required to match an employee’s contribution up to 1%. This will increase to 4% by 1 April 2011.
• A $40 annual government contribution to fees.
• If you are over 18 years old, the government will match up to $20 per week of your savings through a member tax credit.

What do you need to do?

What do employees need to do?

You can contribute either 4% or 8%. Please note that this is either 4 or 8% of your pre-tax income. For example, if you earn $100,000 and choose 4%, $4,000 would be credited to your KiwiSaver fund, but you will still pay tax on that amount. We recommend that you contribute 4%. This will ensure that you maximise both the member tax credit (depending on the level of your income) and the future mandatory employer contribution.

What do the self-employed or those currently not in the workforce need to do?

We recommend signing up directly with one of the scheme providers and contributing $20 per week. This will ensure that you maximise the member tax credit.

The KiwiSaver calculators

To calculate the value of your KiwiSaver fund in retirement, check out the Shape of Money KiwiSaver calculators: for employees and For the self employed / Not in the workforce.

Which KiwiSaver fund should I choose?

For most people, this will be a very long-term investment, so don’t get too stressed about which fund manager to go with and whether it should be a conservative, balanced or growth fund. If you like, you can even choose a fund because of the colour of the brochure/investment statement. But if you turn 65 in 30 years, a growth fund probably is the way to go. In addition, schemes will acquire some history of returns over the next few years and changing funds should not be a problem. Consider the Shape of Money’s information “Before you Invest”.

The fund doesn’t have to be the one recommended by your employer. And, of course, it is recommended that you use an independent adviser.

Want to consider some other resources?

• From the Inland Revenue - Your Introduction to KiwiSaver – Employee Information Pack, KiwiSaver Employer Guide, and their information on salary sacrificing,
• The government’s official KiwiSaver website, and
• The KiwiSaver Scheme Providers.

Some final KiwiSaver notes

Will the 1 – 4% employer contribution affect your other salary increases?

Probably, but the impact will be probably be felt whether or not you have a signed up for a KiwiSaver scheme.

Mortgage Diversion Option

If you have a mortgage, choose a fund manager which will allow you to redirect half your personal contribution to mortgage repayments. However, please note that the diverted repayments won’t be eligible for the tax credits. Therefore, ensure that $1,040 per annum is not diverted.

Is there a catch to KiwiSaver?

Your money is locked away until age 65 (unless you join between the ages of 60 and 64 in which case you will need to wait 5 years). To join a KiwiSaver scheme, you need to be a New Zealand resident and under the age of 65.

What if I have high levels of debt or high interest debt?

The same recommendations apply. Join a KiwiSaver scheme and obtain the maximum level of tax credits and employer contributions if applicable. But you could consider the Shape of Money information on Debt Reduction versus Saving.

Why is the government being so generous?

They’re not. They are just returning the money they took off you through income tax in the first place.

Random page of the month

Contributing to KiwiSaver may require some budget adjustments.