KiwiSaver

How Does KiwiSaver Work?

How You Make KiwiSaver Contributions

For most people, KiwiSaver is work-based. This means you'll receive information about KiwiSaver from your employer, and KiwiSaver contributions will come straight out of your regular pay.

• If you choose to join, contributions are deducted from your pay at the rate of either 3%, 4%, 6%, 8%, or 10% (you choose the rate) and invested for you in a KiwiSaver Scheme.
• If you’re automatically enrolled you can ‘opt out’ (leave KiwiSaver), but only between two and eight weeks of starting the job. Once you join you must contribute for at least 12 months. After being a KiwiSaver member for 12 months you can take a break from saving (called a ‘savings suspension') or carry on.

If you're self-employed or not working, you can contribute directly to your particular KiwiSaver Scheme investment provider. These are called voluntary contributions, and anyone who is self-employed or not working is usually well-served by contributing at least $1,043 each year to obtain the annual government contribution, described below.

How Do KiwiSaver Scheme Investments Work?

When you make a contribution to your KiwiSaver Scheme, that money goes into a pool with the contributions made by everyone else invested in the same fund choice. Those pools of money are then invested into a combination of bonds, cash, shares, listed property, and other assets depending on which fund you're invested in.

KiwiSaver funds are a type of portfolio investment entity (PIE). A PIE fund is a type of New Zealand managed fund that invests the contributions from investors in different types of investments.

How Is Your KiwiSaver Scheme Investment Taxed?

You pay tax on the income you receive before it is paid in to KiwiSaver, then there are special tax rules that apply to the investment return earned by PIE funds.

For tax reasons PIEs were created in 2007, following the introduction of KiwiSaver. Before then, New Zealand tax laws meant that investors in managed funds could find themselves paying more tax compared to if they had invested directly in shares, which was a disincentive to investing in managed funds and would have discouraged people from joining KiwiSaver.

The PIE rules mean that investors pay tax on their own tax rate (the Prescribed Investor Rate or PIR), which is usually slightly lower than their income tax rate.

How Do You Join KiwiSaver?

KiwiSaver is a voluntary savings scheme in New Zealand. If you are 18 or above and start a new job, you’ll be automatically enrolled in KiwiSaver, with a few exceptions. You have eight weeks to decide whether or not you want to join KiwiSaver. If you do not wish to join, you can opt out.

If you are not auto-enrolled, you can join KiwiSaver by asking your employer or by applying directly to a KiwiSaver Scheme provider.

When the IRD get your deduction details from your employer, the will allocate your KiwiSaver Scheme investment to either:

• One of the default KiwiSaver providers, or
• Your employer’s chosen scheme if they have one.

You can choose to change the scheme you belong to at any time. Just contact your preferred scheme provider and they'll arrange for you to transfer into their scheme.

If you're not already a KiwiSaver member, simply get in touch, it would be the pleasure of our team to help you enroll.

What Are the Benefits of KiwiSaver? Is KiwiSaver Worth It?

KiwiSaver is a hassle-free way to invest regularly, and several great benefits make KiwiSaver a ‘must-have’ component of any wealth creation plan. The key benefits are:

• Annual government contribution of up to $521 per year, subject to member contributions of at least double this.
• Regular contributions from your employer, if you're an employee.
• You can withdraw your funds to put toward the purchase of a first home, subject to conditions.
• If you’re employed, your contributions come out of your pay before you see them, making investing easy.
• If you change jobs or leave work, KiwiSaver stays with you.
• Many people are also eligible for additional funding toward the deposit on their first home.

Inflexibility

Strict withdrawal criteria mean that KiwiSaver Scheme investments will generally be inaccessible until:

• You're eligible for New Zealand Superannuation, or
• you buy your first home, or
• a limited range of other criteria are met. Call or email us for more details.

This means KiwiSaver doesn’t consider varying situations you may be in, and whether this is the best form of investing for your individual needs. For example, if your focus is to save for your children’s education, then KiwiSaver is clearly the wrong model. There are plenty of other investment funds to choose from that achieve the same compounding investment return without being locked away.

You Can Only Be a Member of One KiwiSaver Scheme at Any Time

When an investment passes a certain threshold of value, we typically recommend investing with a range of different investment managers. This is to avoid ‘concentration risk’, or the risk of one investment manager underperforming over a period of time. While concentration risk isn’t a problem for most KiwiSaver members yet, as most balances are reasonably modest, an investment approach which spreads risk between different investment managers is currently only possible with select KiwiSaver Schemes.

KiwiSaver Misconceptions

There are still many misconceptions about KiwiSaver. One of these is that the government guarantees any investment made into KiwiSaver. While the government regulates KiwiSaver providers and helps administer KiwiSaver, the government does not guarantee returns for KiwiSaver investments. This means any investment you make in KiwiSaver is made at your own risk. Arguably, this is actually a significant advantage, as it means that not only should you take an interest in a KiwiSaver Scheme investment (as you should with all investments), but it also stops KiwiSaver providers from taking undue risks - which many surely would if the government was there to reimburse any losses when they made a mistake!

KiwiSaver Changes as the Result of Different Government Policies

Investments in KiwiSaver are subject to the KiwiSaver Act of 2006. As is the case with most pieces of legislation, this act has been changed with successive governments. In general terms, the more years there are to pass before you retire, the higher the likelihood that there will be more changes to KiwiSaver by different governments led by a succession of different politicians.

Specifically, to date, a number of the financial incentives originally designed to encourage people to use KiwiSaver have since been modified or removed. The eligibility age for New Zealand Superannuation has also been increased, which increases the age people must reach to access a KiwiSaver investment.

KiwiSaver Complacency

Your entry age, who you choose to place a KiwiSaver Scheme investment with, your contribution rate, and the type of fund you choose can all have massive effects over the long term. Many New Zealanders are simply sleep-walking towards retirement, and have no idea how much they might need for their retirement nest egg.

KiwiSaver Is Not Enough

KiwiSaver is an effective long-term investment option. However, many New Zealanders mistakenly believe they'll have enough savings for retirement just because they're a KiwiSaver member. This is not true for most people, as KiwiSaver is just one part of a larger strategy for building wealth.