From today, 1 April 2019, there are some important changes that apply to all Kiwisaver schemes. The changes to Kiwisavers are part of a broader range of changes intended to amend or modernise several tax acts under the Taxation (Annual Rates for 2018-2019, Modernising Tax Administration, and Remedial matters) Bill.
New contribution rates
The main change kicking in today, is that there will be two new contribution rates for members to choose from. You can now choose to contribute 6% or 10% of your gross salary into Kiwisaver, as well as the existing options of 3%, 4% or 8%. Your employer contributions will remain at 3%, unless your employer has agreed to a greater amount.
The main driver behind this change is that Inland Revenue figures show that 24% of members contribute at the 4% rate, but only 9% of members at the 8% rates. This indicates that there might be greater take-up if a 6% option was offered.
The 6% and 10% options will give members greater savings flexibility which align with their personal retirement savings goals.
Shorter savings breaks
If your circumstances change unexpectedly you can pause your Kiwisaver by applying for a ‘saving suspension’. This was previously called a ‘contribution holiday’. This period was up to five years, but has now been shortened to twelve months.
Renaming the contributions holiday to a Savings Suspension and reducing the period from 5 years to 1 year was intended to make it clearer that stopping contributions has a negative impact on retirement savings. If members temporarily cease their contributions, this also means no government or employer contributions as, as relevant.
How much more could you save if you increase your Kiwisaver contributions?
Increasing your Kiwisaver contribution can make a big difference over the course of a working career. Kiwisaver members have their salary deducted at a minimum default rate of 3%, unless they choose to increase their contributions.
Increasing your contributions by just 1% from 3%-4% could add up to tens of thousands of dollars. Increasing your contributions more, for example from 3% to 8%, could add up to hundreds of thousands of dollars.
An example in the NZ Herald suggests that: a 35-year-old with $25,000 KiwiSaver funds, working salary $50,000 per annum gross (2 per cent inflation uplift per annum). Raising the contribution rate from 3 to 4 per cent would net approximately $40k extra, raising from 3 per cent to 8 per cent would raise approx $215k extra (as at age 65). (Estimates and returns are not guaranteed and intended only as a guide).
Get the most out of your Kiwisaver
Here are 3 things you can do today to get the most out of your Kiwisaver:
- Consider increasing your contribution rates
- Make sure you are investing in the right type of Kiwisaver Fund. Default Kiwisaver schemes tend to be more conservative and offer more limited returns. But, you can choose a more aggressive growth fund. Make sure that the investment strategy for your Kiwisaver fund reflects your future life goals. It is important to periodically reassess your Kiwisaver as your life goals, or personal circumstances change. Compare Kiwisaver schemes with Money Compare.
- Don’t miss out on the Government Contributions. Did you know that for every dollar you put into your KiwiSaver account, the Government puts in 50 cents - up to $521.43 each year? You just need to make sure that you have contributed at least $1,042.86 into your Kiwisaver account over the past year. The deadline for contributions is the end of June, and you’ll usually see the extra $521 in your Kiwisaver account by the middle of August.
More Changes coming to Kiwisaver
Stay tuned for more changes that are due to be implemented on 1 July 2019 and 1 July 2020. The upcoming changes will affect those aged 60 and over who want to join, or are members of Kiwisaver schemes.