The 2011 Budget and KiwiSaver

Piggy bank savingsKiwiSaver will be affected by National 2011’s budget, but it will still be a worthwhile scheme for nearly everyone under 65 to be in.

  • The member tax credit from the Government (which doesn’t apply to under 18s) accruing from July 2011, is going to be cut in half from $1 per $1 matching to 50 cents to $1 matching. So to get the full match you’ll have to save about $20 a week ($1040/year) and will get a $10 match ($520/year) from the Government.
  • To balance this out, minimum contributions will be raised for employees and their employers to 3% from April 2013 (the other employee options will stay as 4% and 8%).
  • However the employer contribution will be taxed from April 2012 (the 2% minimum will end up being about 1.34-1.79% depending on your tax rate, the new 3% about 2.01-2.685%).

This will affect the un/self-employed because their tax credit will be reduced with no balancing employer contribution. Increased employer contributions will benefit people planning to buy a first home using their KiwiSaver savings as they’re unable to withdraw member tax credits anyway. A likely reduction in pay rises because of the increased employer contributions will affect KiwiSaver and non-KiwiSaver employees.

Standard and Poor’s says that the changes “could push New Zealand further into debt and would need to be part of an overall package to boost national savings.”

The $1000 Government kick-start, the up to $5000 first home deposit subsidy and the requirement of being in the scheme for at least a year before you’re able to go on a contributions holiday are staying.

The kick-start, tax credit and employer contributions are still free money.

Ramit Sethi has an excellent book called I Will Teach You To Be Rich which is available from Amazon and The Book Depository—who have free shipping to basically everywhere. He recommends young people invest about 10% of their income and take advantage of available employer/tax benefits. Eg. contributing the minimum into KiwiSaver, getting the employer match (and if necessary topping up contributions to $1040 to get the $1040/$520 government match, but set it up so it’s done automatically each pay period), then invest the rest of the 10% in a non-KiwiSaver scheme. The main benefit of a non-KiwiSaver scheme compared to KiwiSaver is laxer withdrawal rules—the withdrawal age is likely lower, plus if it’s employer based, employers may contribute a higher amount than in KiwiSaver)

I like SuperLife as a KiwiSaver fund provider because of, among other things, their AIMAge Steps fund which automatically re-balances asset allocation from assets like shares to assets like cash as you age. Mary Holm has a book called The Complete KiwiSaver which is from 2009 but will still be largely relevant to making decisions about things like funds and providers.

Are you in Kiwisaver and why or why not?

Image credit: Alan Cleaver

6 thoughts on “The 2011 Budget and KiwiSaver

  1. Thanks for the post – it’s nice to see an unbiased explanation of the changes.

    I’m currently not in Kiwisaver. It seemed very likely to me from day one that National would bring some changes in as many elements don’t align with their ethos. For example, it makes more sense to tax the employer contribution and reduce your normal PAYE as it means we have more choice about where we invest, and employers can contribute equally to non Kiwisaver funds.

    Now that the changes have been made, the program still looks very attractive. The $5000 towards buying a home is the main attraction. I’m planning to join at some point in the near future when I get around to it so we can buy a house in 2016 saving $10k.

    FWIW my wife and I are fairly disciplined savers and currently save significantly more than 10% of our income and will continue to do so irrelevant of whether we’re in Kiwisaver or not.

      1. At the moment there’s not enough to make investing (beyond a Raboplus savings acct) particularly worthwhile. It’s also handy to have a bit of cash readily accessible just in case.

        I would envisage putting the Kiwisaver stuff into slightly higher risk investments, and leaving the other stuff in safer term deposits/savings accounts etc. Nice to have a balance.

        1. If I had a favorite bank (is that sad?) I think I’d say it could be RaboPlus (who are now RaboDirect or something).

          If you’re planning on withdrawing for a home deposit I think it’s recommended to keep money in lower risk assets (some providers have a special home buyers plan) because then you will reduce the risk of losing money during a market low on withdrawal. Something like that. #betterlivingeveryone

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