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Limited choices to boost KiwiSaver accounts

 

Q.        I will reach retirement age in a couple of years and I am contributing 8% to my KiwiSaver account.  I have found it to be a very easy way to save and I am very pleased with my current balance.  I would like to increase my contribution rate to 10% (rather than give an extra 2% directly to my provider from my bank account). My job involves payroll and it would not be difficult for me to adjust my contribution rate - but am I allowed to do this? It is my wages. The company contribution would be unchanged. Even if I wasn't involved with payroll, surely a written request to payroll would suffice?

 

A.         The short answer is, no you can’t.  From 1 April 2013 the options are 3%, 4% and 8%. 

 

When the Scheme started in 2007, the Labour Government set employee contributions at 4% and planned for employer contributions to reach 4% by 1 April 2011.  When National won the next election they adjusted the settings, reducing the employee minimum from 4% to 2% and reducing the rate of employer contributions as well.

 

Now that the minimum contribution has increased from 2% to 3%, you would expect the other options to go up by at least 1% well.  Well, they haven’t.  I wondered whether someone was ‘asleep at the wheel’ and hadn’t given much thought to the implications of raising the minimum to 3%.  It certainly makes the 4% option look rather redundant.  Without even pulling out my calculator, I would think that 6% and 9% would give workers more choice.  I went looking for answers.  My first port of call was Inland Revenue.  They commented as follows:

 

“Currently, members can only have KiwiSaver deductions of 3 per cent, 4 per cent or 8 per cent made from their gross salary and wages, which are then passed through to Inland Revenue via their employer’s monthly schedule.  Members can make voluntary payments direct to their KiwiSaver account by arranging this with their scheme provider. Members can also make voluntary payments to Inland Revenue (although not through the employer schedule) which are then forwarded on to their scheme provider.  Any future changes to the KiwiSaver deduction rate would be decided by the Government.” 

 

The IRD spokesperson pointed out that Inland Revenue’s job is to administer the KiwiSaver Scheme, not to seek to change it in any way.

 

I had to go looking further afield to find someone who was engaged in the numbers behind the legislation.  I found it in Treasury and received this reply from a senior analyst: “No, the Government has no plans to adjust the higher contribution rates along with the minimum (and default) rate, so your correspondent will indeed need to arrange the additional contribution directly with his or her KiwiSaver fund manager.  The point of having only a limited number of options for contribution rates direct from salary is to keep administrative costs down for employers; the Government would certainly not claim that any of 3%, 4% or 8% is the right, or the best, rate for any individual member.  That of course depends on their individual circumstances, ambitions, short and long term financial requirements etc.”

 

So there you have it.  Your choices are indeed limited.  Should we all be looking to contribution more than the current maximum of 8%?  It depends on your personal circumstances, bearing in mind that for most people KiwiSaver is locked in to age 65.

 

Younger people have the advantage of time on their side when they are saving, but they often have big financial commitments and children to put through school and perhaps university.  The time to ramp up your KiwiSaver is when you are over those hurdles and getting closer to the finish line. 

 

A 35 year old on $50,000pa salary contributing 3% into KiwiSaver (and getting 3% from their employer and $521 in MTC) may accumulate $218,321 over 30 years (assuming a net investment return of 5%pa).  Increasing their employee rate to 4% will make only a modest difference but choosing 8% could help to build a balance of around $384,418 at age 65.   (For the sake of this exercise I have assumed that the employer contribution stays at 3%.)  Use the KiwiSaver calculator on the ‘Sorted’ website to find out what you are likely to save over your working life.

 

If you want to save more than 8% you will need to set up a direct debit with your fund manager and make additional contributions to coincide with your salary payments.  Most will accept regular contributions from $20 per week.  The downside is that you may incur bank fees (say .25c per transaction) and it is something else for you to monitor.  The upside is that you are in control and can stop or change it quite easily.

 

 

 

Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.