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It pays to know benefits of Member Tax Credits
 
Q.           I read your article in the HB Today business section of 13 August with interest. Like the reader who asked that question I too am self-employed. I rejected KiwiSaver for the same reason (paying off mortgage first) but haven't taken into account Member Tax Credits because I have no idea what it is. Could you please explain what it is?   Is it new since the inception of Kiwisaver?
 
A.            I have written about Member Tax Credits and the self-employed several times over the past two years so you must someone who has taken to reading my column more recently. For you and any others in this situation I will open up the mysterious world of Member Tax Credits.
 
Which bureaucrat dreamed up the name “Member Tax Credits”?  Member Tax Credits (or MTC) are not something you claim to reduce your tax bill, nor do you have to pay tax to get them. They are an annual top up of every KiwiSaver account for members who qualify. “Member Cash Top-ups” would be a better name. All you need to do to qualify for the maximum of $521.43 per year is to be over 18 (and under 65), resident in New Zealand, and contribute at least $1042.86 over the 12 months to 30 June.  Like the $1000 ‘kickstart’ Member Tax Credits have been in place since KiwiSaver started in July 2007.
 
When KiwiSaver was introduced it was mainly regarded as a savings vehicle for people earning salaries and wages.  People starting a new job were automatically enrolled, so the emphasis was on their understanding of the Scheme. The Government decided that joining KiwiSaver would be optional rather than compulsory. The benefits of the Scheme were not widely understood and many people like you dismissed the Scheme as not for them. We were also entering the period of market turmoil which came to be known as the Global Financial Crisis. Many people avoided KiwiSaver because they didn’t trust the Government that had created it or the investment markets where the money was going.
 
Unfortunately this means that you and many others like you have missed out on thousands of dollars of Member Tax Credits. For the first four years from July 2007 to 30 June 2011 MTC was $1042 per year, but it has since been reduced to 50c in the dollar or $521 per year. Since KiwiSaver started the Government has ‘given away’ $5214.30 in MTC to every KiwiSaver member who qualified. Over the same period, a qualifying KiwiSaver member would have contributed at least $6257.16. With the $1000 ‘kick start’ that person would now have $12,471 in their KiwiSaver, plus any investment returns.
 
As you can see, putting $6257.16 into KiwiSaver to achieve $12,471 over 6 years is a better ‘investment’ than putting that $6257.16 into mortgage repayments at say 6% per annum. 
 
Now that MTC has been reduced the benefits are not quite as impressive, but they are still worth having for anyone whose budget will allow them to save $1042 per year. Beyond this amount you are at the mercy of investment markets and repaying the mortgage would be the better option.
 
Once you turn 65 you no longer qualify for MTC, unless you joined within the previous 5 years in which case your entitlement will continue until you are eligible to withdraw your KiwiSaver funds.
 
Despite those early misgivings, KiwiSaver has proved very popular and membership has exceeded forecasts. There are now around 2,165 million members. While this is an impressive number, it is still less than half our resident population of around 4,480 million. No doubt there are many like you who have not realised that KiwiSaver has benefits for the self-employed as well as those earning salary or wages. Entitlement to MTC in the first year is calculated from your joining date. To all those readers who have been meaning to join but haven’t yet got round to it, your procrastination is costing you $10 a week in missed MTC.
 
 
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. You can read earlier columns at www.peak.net.nz