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Options for increasing KiwiSaver contribution
 
Q.           My wife and I have both been in KiwiSaver for 6 years. We have been contributing the minimum and there have been times when I have thought about taking a contributions holiday because our money never seemed to go far enough. But now our children are off our hands and for the first time in a long while we have money to spare. We would like to increase our level of contributions – how do we go about doing that? 
 
A.            Currently the minimum level of KiwiSaver contributions for salary and wage earners is 3%.  Those who want to contribute more can choose between 4% or 8%. To make this change you should fill out the KS2 form (available on the IRD website) and give it to the person at your work who looks after the payroll. You will need to select either 4% or 8%. If you want to contribute more than 8% you will have to set up a direct debit or automatic payment directly with their fund manager for the difference. If for example you are earning $60,000 per annum and wish to save 10% of your salary, you can have 8% going through payroll and 2% (or $100 per month) going directly to your fund manager from your bank account.
 
You have not mentioned whether you are paying off a mortgage or any other debts. As long as you are paying enough into your KiwiSaver to get your full entitlement of Member Tax Credits, you should not increase your contributions until you have paid off all your debts. This is because the returns from KiwiSaver may be less than the interest you are paying on any money you have borrowed. While in some years KiwiSaver returns may be higher than the interest rate on a home mortgage, you cannot expect this to occur year after year. You should know what interest rate you are paying on your debts, and this is the effective return you are getting on any extra money you put towards paying them off.
 
If you have paid off all your debts then increasing your KiwiSaver contributions while you have surplus income could be a smart move. But remember that the money is locked away until 65, so have enough on hand to live on for up to three months in case of an emergency. 
 
To help you review your current level of savings, go to the Sorted website and try out the KiwiSaver Account Calculator. This allows you to put in your age, salary, level of contributions and your current KiwiSaver balance. It will then estimate what you will have at age 65 if you continue at your current level of contributions. This amount can be adjusted for inflation, or you can see what the amount will be if you take inflation out of the equation. Inflation will reduce the spending power of your savings particularly if you have 20 years or more to go before you reach the age of 65. I suggest you first adjust for inflation and then see what the number will be without the adjustment – this is the actual dollars you could save. The calculator uses various assumptions including your tax rate and the rate of inflation.
 
When you get to the end you will find an adjustment where you can increase your contribution rate to 4% or 8% and then see the difference that makes to your total savings by age 65.  Click on the link “How this calculator works” to get the full explanation on rates of return and other assumptions.
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 06-8703838 or go to www.peak.net.nz. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz