“What will you choose with KiwiSaver – Faith, Hope or Charity?”
By Jocelyn Watkin and Kim Gabites
What is KiwiSaver and is it the great hope for all working New Zealanders? KiwiSaver is a work-based retirement savings plan, due to launch on July 1, 2007. It has a number of benefits, but only for those who participate. Everyone has to pay to be in, but the Government will give $1000 to top up each person’s contribution.
If you are an employer, you need to get yourself up to speed quickly in order to comply with KiwiSaver legislation.
The main features of the KiwiSaver Scheme, which is for people aged 18-64, are:
- Employees can contribute either 4% or 8% of their pay to the scheme.
- Employers can make extra contributions on behalf of the employee.
- From July 1, 2007 every new employee will automatically be enrolled in the scheme. They have up to 8 weeks to opt out.
- From July 1, 2007 every existing employee can opt into the scheme.
- All contributions will be ‘locked in’ to age 65 or for 5 years, whichever is later, except in certain circumstances (such as serious illness).
- The Government will give each person a $1000 kick-start, which is also locked in until they turn 65.
- After a minimum of three years in the scheme, first homebuyers can make a one-time withdrawal for the purchase of a first home.
- Financial organisations and companies (known as fund providers / managers) will be registered by the Government to manage a number of different KiwiSaver schemes. The fund providers / managers will make information and forms freely available to help people choose which scheme they want to contribute to. (Note: the Government does not guarantee the performance of any scheme or fund provider / manager.)
- Self-employed people, people under 18 and beneficiaries can join, but they need to make payments directly to Inland Revenue or a KiwiSaver fund provider / manager.
- Contributors will have personalised accounts that they can take with
them as they shift jobs.
The KiwiSaver Scheme is voluntary for employees, but not for employers. As such, existing employees and the self-employed must ensure they opt in, to be part of the scheme.
Opting in or out will depend on personal circumstances, as KiwiSaver will suit different people at different stages in their lives.
It can be good for younger workers just beginning their careers. Given time, 4% of their pay can grow to a large amount with very little effort. After three years, a percentage of KiwiSaver contributions can be withdrawn for a first home purchase.
KiwiSaver makes it easy to make a start on retirement savings, especially those who haven’t yet got around to it. For anyone under 65 years old, it is never too late to begin with KiwiSaver.
Women live 5 - 7 years longer than men do, on average, but tend to earn less over their lifetimes to support these extra years. Divorce and separation can further reduce standards of living. KiwiSaver can help all women to take control of their financial destiny.
Those who intend to keep renting, instead of owning their own homes, will find that KiwiSaver could build up a nest egg to help pay for accommodation costs in retirement.
KiwiSaver also offers some flexible choices to suit personal lifestyles. After 12 months, the scheme allows a contributions holiday for up to five years. This will allow, for example, an extended OE, a return to study or starting a family.
On the other hand, KiwiSaver may not be right for a person who:
- has significant debt that needs to be paid first
- has other savings/investment plans which will provide sufficient income in their retirement, or
- is currently on low wages and who thinks that the retirement pension from New Zealand Superannuation will be enough.
However, there are significant risks with this last point. The age of eligibility for New Zealand Superannuation may rise over time, or the amount paid out to each superannuitant might drop. If so, the risk of not opting into KiwiSaver could mean that seniors will live on a lot less money than now, or be dependent on charity.
The key point is to make a start. There may never be a better opportunity. At the very least, begin with the minimum contribution (4%) for 12 months to qualify for the Government’s $1000 top up. If this is difficult then take a contributions holiday after one year until a pay increase, or when living costs decrease (e.g. for parents, when adult children leave home). After that, start the contributions again. The contributions already made will continue to work hard and grow with the interest earned.
Of note, those with other investments, as in bullet point two above, can still choose to contribute to KiwiSaver on top of their existing schemes.
Employers, however, do not have a lot of choice with KiwiSaver. While they do not need to fund the scheme directly (although they can do so if they wish), they are required to bear the costs of managing the administration and ensuring payroll systems are established to deduct employee contributions.
All employers, even those with only one other person, need to consider implications for their own businesses immediately. An Information Pack will be available from Inland Revenue. Further advice is available from the Employers & Manufacturers Association and many financial planning organisations.
In summary, KiwiSaver can offer choice and flexibility in saving for retirement. There are benefits worth considering, such as the chance to get started, free $1000 Government contribution, withdrawal option for first homebuyers, contributions holidays, and the personal choice of KiwiSaver scheme provider and the opportunity to switch this.
KiwiSaver provides the chance to do something about saving for retirement and to start thinking about future retirement lifestyle. Any extra money saved, even if only pocket money, will certainly provide more options in retirement than no savings at all. But, be realistic, too. Small contributions need time to build. Making a start is good, but try to continue for as long as possible.
Whether KiwiSaver is the great hope will depend on the choice an individual person makes about it. Keep faith with yourself, and your needs, and make this the right choice.
By Jocelyn Watkin and Kim Gabites
Note: This article was featured in the April 2007 issue of “Her Business” magazine.
Kim Gabites is a Technical Adviser at Spicers, a financial planning company. Together with Jocelyn Watkin, she is writing a book on financial planning called “Keeping the Faith”.
For a free fact sheet on making choices about financial planning, please click here.
For those wanting information about financial planning, please contact Spicers Corporate Solutions enquiry line on 0800 267 776 or email: Spicers Corporate Solutions on corporatesolutions@spicers.co.nz or click on www.spicers.co.nz.
For other information about KiwiSaver, visit: www.kiwisaver.govt.nz/joining or www.sorted.org.nz