With about 1 million eligible New Zealanders not in KiwiSaver, you have to ask why?

In some cases, it will be because they cannot afford to save or prefer not to.  However, in many cases, it will be because it has not been explained clearly or they have simply not got around to joining.  For most New Zealanders who are eligible to join, KiwiSaver lets them grow their retirement savings more than other alternatives.

To understand KiwiSaver, like any savings plan, the key issues relate to what you have to put in and what you will get out.  KiwiSaver works better for most New Zealanders, as the government and your employer subsidises your savings. 

To illustrate the workings of KiwiSaver, it is best to look at an example.

Michael is a 35 year old employee and earns $34,762 a year.  If Michael joins KiwiSaver, he must save 3% of his pay (3% is $20 a week ($1,043 a year)).  As an employee, he must save the 3% minimum for at least his first year. 

After Michael has been a member for 1 year, he can choose to stop saving at any time (he just has to tell the IRD who will tell his employer).  KiwiSaver is therefore a flexible savings option.

After 1 year, Michael has saved $1,043 and his balance is $3,475. 

Year Opening balance Michael's savings Employer savings Government Subsidy (MTC) Fees Returns at 5% p.a. Total
1 $0 $1,043 +  $860 + $521 -  $33 +  47 =  $2,438
    Michael must pay 3% Michael's employer must pay 3% (less tax) The government also subsidises Michael's savings 50 cents for $1 up to $521 a year.  They call it a member tax credit (MTC).     Michael's account after 1 year

 

After 1 year, Michael can stop saving or choose to continue.  If Michael stopped saving, his balance continues to grow with the future returns.  However, in most cases, it is best to continue to save 3%.  If Michael does this, he continues to get the employer subsidy and the annual government MTC.  Michael should therefore, look to save each year until age 65.  

If Michael continues to save, the position after year 2, is:

Year Opening balance Michael's savings Employer savings Government Subsidy (MTC) Fees Returns at 5% p.a. Total
2 $2,438 $1,043 +  $860 + $521 -  $33 +  169 =  $4,998
    $2,086        

 

Remember, after 1 year, Michael can continue to save or stop at any time. If Michael continues to save, the position over the next few years is:

Year Opening balance Michael's savings Employer savings Government Subsidy (MTC) Fees Returns at 5% p.a. Total
3 $4,998 $1,043 +  $860 + $521 -  $33 +  $297 =  $7,686
4 $7,686 $1,043 +  $860 + $521 -  $33 +  $431 =  $10,508
5 $10,508 $1,043 +  $860 + $521 -  $33 +  $572 =  $13,471
               
    $5,215          

So after 5 years, Michael has converted his $5,215 savings into $13,471.

After 30 years, i.e. at age 65, if Michael continues to save, his wealth is $161,963.  Of course $161,963 when Michael is 65 is not the same as $$161,963 today, because of inflation.  If we allow for inflation and wage growth, Michael will have savings of about 3.1 times his salary at retirement.  Michael can therefore ask himself the question, “if I was 65 and retired today with a lump sum of 3.1 times my salary, will I, with NZ Super, have enough savings?  If the answer is no, at some point, a higher savings level is required.  Even if the answer is no, Michael is still better off than he would have been by not saving under KiwiSaver because of the employer savings and the government paid money.

Remember, Michael also gets the NZ Super.

Q&A

Does Michael have to pay 3%?

As an employee, 3% is the minimum level of savings by pay deduction. Michael could also choose to pay 4% or 8% by way of pay deduction. Michael can also make whatever other savings he chooses, whenever he chooses, by paying it direct to his KiwiSaver provider. But by pay deduction, Michael must pay a minimum of 3% for 1 year.

As an employee, after 1 year, Michael can stop saving at any time.

Does Michael’s employer have to save?

Yes. If Michael saves 3% by pay deduction and Michael is 18 or over, his employer must save 3%. In some cases, the employer will save the contribution to a different super scheme but there are not many employers in this category.

The employer’s 3% to KiwiSaver is taxed and the net amount paid to KiwiSaver. It stops at the earlier of the date when Michael stops saving and when Michael reaches his KiwiSaver retirement age. Currently, the KiwiSaver retirement age is age 65, except for those that join after age 60 when it is 5 years’ after they joined.

What is the maximum the government pays?

The government matches an employee’s savings $1 to $2, up to $521 a year. If Michael’s savings are below this level, Michael can choose to top them up so that he gets the maximum money from the government. If the savings are above $1,043, the government only pays $521.

The government’s matching subsidy is known as a MTC (member tax credit). MTC’s do not apply to people under age 18, or for people over age 65 who have been in KiwiSaver for more than 5 years.

What fees are payable?

The fees will depend on the KiwiSaver provider. They should be in the Product Disclosure Statement. To compare fees, go to the Retirement Commissioner's site www.sorted.org.nz. In most cases, the providers with low fees will be best.

What return will I get?

This depends on how your money is invested. Each provider will have a choice of investment options. Your return will depend on the option you choose, what happens in the market and of course how much fees are deducted. The better providers have a range of options that will let you change your strategy as your needs change.

Will I also get NZ Super?

Yes. NZ Super is paid on top of the KiwiSaver and is not means tested.

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Legal stuff

This article is a general investment commentary. It should not be considered as being personalised financial advice. Members should obtain appropriate financial advice from a suitably experienced Authorised Financial Advisor, before making any investment decisions. Only an Authorised Financial Advisor can legally take into account the person’s personal circumstances. SuperLife does not give personalised financial advice.