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Don’t miss out on MTC while on a contributions holiday

Q.        My son is currently on a KiwiSaver contribution holiday while he focusses on reducing his mortgage.  His employer is one of those who does not give him an extra 3%, he takes the employer contribution out of his wages.  So taking a contributions holiday effectively gives him an extra 6% before tax.  However, he does miss out on MTC.  Can he pay $1042 to his KiwiSaver provider directly, to get maximum MTC?

A.         Yes, he certainly can make voluntary payments directly into his KiwiSaver account. Paying in $1042 to get the Government top up of $521 will give him a better ‘return’ than putting that amount on his mortgage.
 
Being on a contributions holiday means that KiwiSaver contributions are not being taken out of his wages, and employer contributions are not being made either. Once a person earning salary or wages has been in KiwiSaver for a year, they can take a contributions holiday for any length of time from 3 months up to five years. 

I would hope that there are not too many employers who include their contributions in the total wage package. However, unless someone is on the minimum wage, it is not illegal for an employer to include employer contributions in a wage agreement. According to lawyer Emma Harding, “Section 101B(4) of the KiwiSaver Act allows employer contributions to be bundled into employees’ pay under “total remuneration” agreements, if the parties have entered into the agreement after 13 December 2007 and where the agreement accounts for the employer contributions in the employee’s pay.  Total remuneration arrangements can be used to treat employees doing the same job equally – i.e. such arrangements mean that employees joining KiwiSaver do not get remunerated in total at a higher level than those who choose not to join KiwiSaver.  The rationale behind it is that employees can choose how their remuneration is spent.  As set out above, in order to meet the requirements set out in the KiwiSaver Act, a “total remuneration” agreement must account for employer contributions in the employee’s pay.”
 
While I admit that the 3% employer contribution may be a burden on some employers, discouraging workers from joining KiwiSaver means that people like your son will not enjoy the quiet satisfaction of a growing KiwiSaver balance. There will be many workers who after a hard day at the office take comfort from the fact that they are at least salting away a little nest egg. To many, that represents a holiday or a new car when they turn 65 - popular spending choices currently for KiwiSavers members reaching the age of entitlement. As the years go by and the numbers grow, KiwiSaver members will be able to do some serious planning with their savings. A 40 year old earning $50,000 pa and contributing 3% could see their KiwiSaver grow from say $20,000 today to $260,000 at age 65.
Your son has made the decision that he is better off repaying his mortgage than contributing to KiwiSaver. If his situation improves he can resume his KiwiSaver contributions at any time, he does not have to wait till the end of his contributions holiday. According to Inland Revenue’s KiwiSaver website: “You can start or stop your contributions at any time during your contributions holiday but if the change is within three months of the last change, your employer needs to agree.  Your employer will be required to begin compulsory employer contributions again when you restart the contributions from your pay.”
 
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 personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz