The Government has recently rolled out a bundle of changes to the KiwiSaver scheme. What are they, and what do they mean for you?
The changes are minor but offer more flexibility
There are four changes to KiwiSaver, all in response to feedback from the public. While they don’t change the core function of this managed investment scheme, there have been some minor modifications that you may want to take advantage of.
Starting 1 April 2019
- Addition of 6% and 10% member contribution rates
When KiwiSaver was first launched, there was only two rates of contributions, at 4% or 8%. Later, they added the option of a 3% contribution to help get people with lower incomes into the scheme.
The feedback since has been that the gap between 4 and 8% was too big. IRD figures show that 24% of people make 4% contributions, but only 9% do at the 8% rate, which suggests that a rate in between may get greater up-take. In response to this, there is now an additional rate of 6%.
However, some members want to contribute more than 8% to the KiwiSaver. To make this possible, a 10% rate has been added.
- Contribution holidays scrapped
Previously, you could take a contributions holiday for up to five years. You would simply submit a form, set it, and forget it. Now they have removed ‘contribution holidays’ and replaced it with a ‘savings suspension’. This shortens the time period to one year although you can renew it every year for up to five years.
This change does two things. It removes the positive connotation with ‘holiday’, and it means you have to make an active choice to continue taking a break from saving every year. You can still roll the suspension over, but it must be a choice you make.
Starting 1 July 2019
- People 65 and over can join KiwiSaver
At present, you can’t join KiwiSaver if you’re 65 or over. This has changed so that you can now join KiwiSaver at any age. Since the introduction of KiwiSaver, there are fewer privately managed fund options available, so this gives retirees more options for managing their savings.
Starting 1 April 2020
- The 5 year lock in period affecting people 60 and over is being scrapped
KiwiSaver members impacted by the five year lock in period (i.e. members who enrolled before July 2019, and who were aged between 60 and 64 when they enrolled) will soon be able to opt out of this lock in period any time after they reach 65. This means that KiwiSaver funds can be accessed by everyone at age 65, irrespective of when you deposited them.
However, should you opt out of this lock in period, you will no longer be eligible to receive compulsory employer contributions or the government contribution.
Should you change your contribution rate?
In a word, yes. You should increase it. Most Kiwis are not contributing enough to fund the lifestyle they’ll need when they retire. The more you save, the better.
For instance, if you are 30 years old and making $50,000 a year, if you changed from 3% to 4% contributions, you’ll end up with more than 10% extra when you get to retirement.
This is especially important when you’re younger. The way compounding interest works is that the interest earned adds to the base savings level. Then, the following year, the interest is calculated on that, accruing interest on the interest. The more money you have saved in your 20’s, the more compounding interest works in your favour and does all the hard work for you.
Or should you do something else with your money?
If you invest in KiwiSaver, your money never even makes it into your pocket. It automagically goes from your wages into savings, without you having to lift a finger. This is great if you are terrible at saving. However, the negative of KiwiSaver is that you can’t access this money, barring disaster, until you’re 65 years old.
For people who are good at saving and investing money, there is no compelling reason to put more money in KiwiSaver over and above what your employer will match. Every year, once you’ve attained the maximum employer contribution and Government top up, there’s no real benefit to contributing more.
You also have less control over KiwiSaver than if you were saving it yourself. While some schemes offer ethical investments (no pornography, tobacco, landmines, guns, fossil fuels etc), you still can’t select what you actually want to invest in. If you want to choose a specific type of investment, then managing your own money may be preferable.
What’s the verdict for KiwiSaver?
The best option depends entirely on you and your situation. If you’re a terrible saver, then KiwiSaver is a great way to force you to save and stop you from spending it. However if you are disciplined with your income, then opting for another savings scheme or investment is feasible.
If you’re unsure and need assistance, contact a professional financial adviser. They should sit down with you and discuss your long-term goals, how much you’ll need when you retire and how to achieve that.
Don’t put off making a decision, because the earlier you start saving, the easier it is to plan for and build the healthy financial life you want.