Every time I read the personal finance columns from Mary Holm and others, I cannot believe that there are still people who are against joining KiwiSaver. Why would you be against free money from the Government? Although not as generous now as it was when first begun, I love getting $521 every year in my account. Plus, your employer will put in some as well. KiwiSaver is the only universal non-employer-sponsored retirement saving vehicle in New Zealand. Employers may have another scheme, but pretty much everyone of working age and younger can join KiwiSaver and benefit.
KiwiSaver is not a tax advantaged scheme like some in other countries. Instead, the government matches your contributions every year up to a maximum (see Member Tax Credit below). Earnings on investments held in the scheme are taxed annually as PIEs or Portfolio Investment Entities. In most cases, these do have a slight tax advantage because the PIE tax rates may be less than marginal income tax rates (This is not an advantage unique to KiwiSaver however).
The money that goes into KiwiSaver comes from three sources.
- You: Money from each pay packet is withheld and forwarded with PAYE to the IRD, who then forwards it to your provider. You can choose to have either 3, 4, or 8 % withheld and these are after tax dollars, i.e. KiwiSaver withholdings do not decrease your taxable income. You can also make voluntary contributions (either to the IRD, or direct to your Kiwisaver provider).
- Your Employer’s Contribution: Employers must make a contribution equal to 3 % of your pay (but this will be reduced by tax). Unfortunately if you are self-employed you won’t get this.
- The Government’s $1000 kick-start: The Government contributes $1000 to your account to help you get started when you first join Kiwisaver. You can only get this once.
The Government’s Member Tax Credit: They match your contributions 50 cents for every dollar you put in up to $1042.86. Remember, it is money you put in, not employer contributions, that are matched. Under the Member Tax Credit, the Government will put in a maximum of $512.43 per year. This usually happens in July because the Kiwisaver year runs from July to June. As long as you earn at least $34,762 and contribute 3%, or $26,072 and contribute 4%, or $13,035 and contribute 8%, you will get the full Member Tax Credit.
The Government’s Interest: Any money held by the IRD will have interest added to it, depending on how long they hold it, but it usually amounts to just a few cents.
With all that free money, everyone between the ages of 18 and 65 should be members and contribute at least the minimum ($1,042.86) to get the full Member Tax Credit every year. Why would you not want free money? If you are in a position to save for retirement, I would always say that KiwiSaver is the place to start.
These aren’t your only considerations. We will go over some more in the future.