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Join KiwiSaver or repay credit card?
 
Q.           My wife and I own our own home, partly due to the generosity of my father-in-law who gave us an interest-free loan when we got married. We are both in our 40’s. I work full time but I haven’t joined KiwiSaver because I have a credit card debt that I’m paying off. I don’t think that KiwiSaver will give me a better return than I will get by paying off my credit card. I am sure I am right in my thinking. Do you agree?

A.            I suspect that you haven’t given enough thought to your argument. Certainly, you can’t expect a KiwiSaver fund to deliver average annual returns in excess of 19.95%, which is what most credit card companies charge (after the interest free period of up to 55 days).   However, in calculating your return you should include the Member Tax Credits you will receive from the Government as well as the 3% you will get from your employer, as part of the return on your investment. 


Joining KiwiSaver will take 3% out of your wages, and up till now that has stopped you from joining the Scheme as you want to put this money towards your credit card debt.  If you earn $60,000, 3% is $1800 per annum. That level of contribution will entitle you to maximum Member Tax Credits of $521 each year, giving you $2321 after 12 months. That is already a 29% return on your ‘investment’ of $1800. And it doesn’t stop there. Your employer will top up your KiwiSaver by a further 3% (taxed), giving you another $1500 or so per year. This boosts your KiwiSaver to $3821 after 12 months – a total return on your original $1800 of 112%. And that’s without including the boost that the $1000 ‘kickstart’ will give you.


Now which looks like a better use of your money – KiwiSaver or credit card?

Let’s look at the broader picture. 
As you own your own home, you are in a strong financial position and should not be paying close to 20% on your credit card debt. If your credit card debt is substantial (let’s say $20,000) and you are likely to take more than 12 months to repay it, then talk to your bank about securing the debt against your home, to get a lower interest rate.    Or switch your credit card to a different bank, which may give you a much lower rate for 12 months. Currently at least two banks are offering deals for customers to switch to their credit cards, with rates as low as 1% for 12 months (terms and conditions apply). 

I am puzzled that you hold your views even though KiwiSaver has been running for nearly 7 years. Perhaps you prioritised repayment of the loan from your father-in-law, and are now using the same argument with your credit card debt? KiwiSaver has undergone some changes over the years - have you kept up with these? In the early days the Member Tax Credits were double what they now are, and provided quite a boost to members’ accounts. Now it is the 3% employer contributions that provide the greater benefit, for those members on salaries and wages. 


I am aware that there are miserly (or struggling) employers who take their contribution out of their employees’ wages. But anyone holding down a good job with an employer who meets their KiwiSaver obligations should think seriously about signing up, to get that extra 3%. I know plenty of people who wish they had saved more through their lives, but I can’t recall meeting anyone who felt they had saved too much.
 

Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not intended to provide personalised advice. Send your KiwiSaver questions to
shelley.hanna@peak.net.nz