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November 06 newsletter

KiwiSaver is now only a matter of months away. Many superannuation fund managers, employers, and an army of public servants, are busy preparing themselves for its official launch date of 1 July 2007.

Is KiwiSaver something that the New Zealand public should be excited about? While the details are still being hammered out in Wellington, it seems that the original version of KiwiSaver, which was destined to follow Winston Peter's compulsory retirement plan into the trash, has been given a breath of life through two major innovations.

But first, what is KiwiSaver and how will it work?

All New Zealanders will be eligible to join a KiwiSaver scheme. However, if you do nothing, nothing will happen. It is only new employees who will be directly enrolled in a fund. And they can opt out if they so choose. This is a voluntary scheme - there is no compulsion. Employees who choose to join KiwiSaver can contribute either 4 or 8% of their gross earnings. If you are not an employee, you will agree on a contribution rate with the fund manager.

KiwiSaver is seen as an easy way for New Zealanders to save. And while super funds have historically been poor performers, these funds do at least ensure that New Zealanders will have saved something by the time that they reach retirement.

What are the benefits?

Low fees - superannuation fund managers will be aggressively competing on fees. The government will offer a subsidy (probably small) on fees, and some employers may also come to the party to help reduce fees.

First house subsidy - the government will give you up to $5,000 towards the purchase of your first home. That might not seem much. But a $200,000 mortgage over 20 years at 8%, has a monthly repayment of $1,673. That same repayment, but now only on a mortgage of $195,000 (thanks Dr Cullen), saves around $20,000 in interest and pays off the loan in just under 19 years.

Your kick-start bonus - the government will put $1,000 into your KiwiSaver fund when you sign up. Again, this is not a huge amount. But with 2% return over 20 years, this will grow to $1,500. Again, this is still not a huge amount, though it might buy a special retirement present.

Mortgage repayments - one of the recent innovations is that you can use half your personal contributions to repay your mortgage. While there are few details yet available, this option may be very useful, particularly to those who have been able to salary sacrifice their contributions.

Employer contributions - another innovation is that employers, subject to limits, will not have to pay the current superannuation tax (SSCWT). This means that employers may be able to offer employees tax effective contribution incentives, instead of a pay increase. This could be the proverbial win, win, win scenario: for the employer (an option to compete for staff), employees (a tax effective solution), and the government (an increase in the national savings rate).

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Check out what existing superannuation funds are all about.