KiwiSaver is a work-based savings scheme that gives New Zealanders a chance to save up for their retirement.
Once you start a new job, you’re automatically enrolled in this long-term retirement savings scheme provided if you’re 18 and above. The good news is that you don’t have to wait until you reach retirement age to get your KiwiSaver withdrawal. If you want to buy your first home, you may be able to withdraw most of your KiwiSaver savings. Also, if you’re going through a significant financial hardship or you’re seriously ill, you may be able to take out some of your KiwiSaver savings.
There are many benefits of becoming a KiwiSaver member. For instance, did you know that both your employer and the government will make KiwiSaver contributions to your account?
Besides, all these contributions are invested in growth and income assets which allow them to increase in value over time.
Want to learn more about what a KiwiSaver account is and why it’s worth joining? Read on.
KiwiSaver Basics: How KiwiSaver Works
The KiwiSaver is a long-term work-based savings scheme that allows you to save up for your retirement. The key contributors to your KiwiSaver account include you, your employer, and the government.
For you to be enrolled in KiwiSaver, you have to be:
- A New Zealand citizen or resident
- Between the age of 18 and 65
As long as you meet these two conditions, you can join KiwiSaver directly with a provider or through your employer. If you’re a salary earner and you’re yet to enrol in KiwiSaver, you can ask your employer to give you KiwiSaver deductions from the salary application form for you to fill.
If you just started a job at a new place, your employer may enrol you in KiwiSaver. For the self-employed, they can choose to join a KiwiSaver directly.
Notably, if you’re under 18 you can only enrol in KiwiSaver after a legal guardian co-signs your application form. For those under 16, you can only enrol in the scheme with the consent of all your legal guardians. Once you join this savings scheme, you’re expected to choose a scheme fund. If you don’t, then you’re enrolled in a default type of investment fund. Default funds are provided by a KiwiSaver default provider. These providers are chosen by the government.
We have partnered with NZ Funds for your future wealth. NZ Funds have a unique approach beyond the standard KiwiSaver provider and recommend the following approach to your future wealth: 3% Employer Contribution + 3% Employee Contribution + 3% Wealth Builder.
Types of KiwiSaver Funds
When you join the KiwiSaver savings scheme, you have to choose a type of investment fund among several funds. The types of KiwiSaver funds differ based on the potential returns and risks.
For instance, if you’re 20 and on your first job, you may join KiwiSaver to save for a first home deposit that you intend to withdraw after ten years. In such a case, you may prefer to pick a less risky fund type compared to a 30-year-old employee who is investing for their retirement withdrawals.
Some of the KiwiSaver fund types that you’ll need to choose from include:
Defensive KiwiSaver Funds - If you prefer a low-risk fund, then the defensive KiwiSaver type of investment fund will suit you perfectly. These funds hold low-risk assets such as cash and government bonds. The defensive funds are also suitable for savers who have already reached their saving goal or those with plans to withdraw their funds soon.
Conservative KiwiSaver Funds - These funds are great if you’re looking to get investment returns that are higher than those you get in a defensive fund. They’re also recommended for savers who are unwilling to invest in more risky fund types such as aggressive or growth funds.
Balanced KiwiSaver Funds - The investment returns for the balanced KiwiSaver funds are higher than what you get in the conservative or defensive funds. Most of the investment assets in these funds include growth assets such as property and shares.
Growth KiwiSaver Funds - These funds are suitable for investors looking for fair high returns in the long term. From the name, these funds will give you a high return and a balanced growth. The only disadvantage with these funds is that you may have to deal with frequent changes in the value of your investments.
Aggressive KiwiSaver Funds - The aggressive KiwiSaver funds are suitable for savers who wish to get high investment returns in the long term. If you don’t plan to withdraw your funds in the short term, then this KiwiSaver type of investment fund will suit you. About 90-100% of the contributions in these funds are invested in high-growth assets such as properties and shares.
What Are the KiwiSaver Benefits
In addition to allowing you to save for your retirement, KiwiSaver has lots of other benefits, as explained below.
1. Free Contributions
Once you join KiwiSaver, you get to benefit from free contributions. In addition to your voluntary contributions, you also get contributions from your employer and the government.
The three key contributors in your KiwiSaver account are as follows:
- You - If you’re employed, the default contribution rate to your KiwiSaver account from your salary or wages is 3%. However, you can choose to increase your contribution rate to 4%, 6%, 8%, or 10%.
- Your employer - Your employer contributes a minimum of 3% of your pay before tax.
- The government - The government contributes a maximum of $521.43 to your KiwiSaver account every year in July. For you to get the full government annual contribution, you must have been enrolled in the scheme for at least one year, be aged between 18 and 65, and also have contributed a minimum of $1,042.86 between 1st July and 30th
2. You Can Withdraw Your Savings Early
If you have been a member of KiwiSaver for 3 years or more, you can get approval to withdraw your savings to buy your first home. However, after withdrawal, you must leave at least $1,000 in the account.
Moreover, you can also take part of your KiwiSaver savings if you want to use them to buy a property that isn’t your first home, provided you’re in a similar situation as a first-time buyer. You can also withdraw your KiwiSaver funds if you’re going through a significant financial hardship or if you have a serious illness that leads to a loss of income.
When Can You Withdraw Your Money
Your KiwiSaver funds are locked into your retirement savings scheme and they’re meant to remain in the scheme until you reach NZ Super which is at 65 years.
But is there any other instance that you may be allowed to withdraw the funds before you reach 65? Yes! You are able to withdraw your KiwiSaver savings before you reach the retirement age of 65 if you:
- Want to use your savings to buy your first home - For this withdrawal to be approved, you must have saved in KiwiSaver for at least 3 years.
- If you move overseas - If you moved and you’ve been living overseas for more than a year, you can withdraw your KiwiSaver savings. Also, if you moved to Australia, you can be permitted to transfer your savings to an Australian retirement scheme.
- In case of an illness - If you suffer from an illness that leads to a significant loss of income that affects your ability to work or one that could lead to death, then you may be allowed to withdraw some of all your savings.
- If you face a significant financial hardship - If you’re going through a financial hardship such that you can’t meet your living expenses or you’re unable to meet your mortgage repayments, you may be allowed to withdraw part or all your KiwiSaver savings.
How Your KiwiSaver Is Taxed
You may be wondering if year KiwiSaver contributions and returns are taxed. The truth is your contributions aren’t taxed, but your earnings are.
Your employer’s contributions are liable for tax. Once they’re taxed, the employer contributions remitted to your KiwiSaver account may be reduced. The contributions you invest in the KiwiSaver scheme are invested and what you earn is investment income. This income is taxed. Your provider deducts the tax and remits it to the Inland Revenue. The tax to be deducted depends on the type of scheme, as explained below.
- Widely Held Superannuation Fund – If you’re in this scheme, your investment income is taxed at 28%.
- Portfolio Investment Entity (PIE) – Every default KiwiSaver scheme falls in this category. In a PIE, your contributions are invested in various funds. What you earn from the funds is taxed using the prescribed investor rate which is a tax rate based on your taxable income.
Ensure you check your product disclosure statement to know the type of scheme you’re enrolled in.
KiwiSaver Mistakes to Avoid
When saving in a savings scheme such as the KiwiSaver, every cent should count. While accommodating as a KiwiSaver, there are still some mistakes you should watch out for.
1. Contributing the Bare Minimum
Although the minimum contribution rate for KiwiSaver is 3%, you should aim to contribute a higher percentage of your pay. Even if your contributions are remitted by your employer, you can still decide to make extra payments to your provider.
For a comfortable retirement, you need to contribute between 10 and 12% of your pay.
2. Being in the Wrong Fund
You need to understand your risk profile so you can choose the right fund for you. Each fund type has different kinds of investments, potential returns, and risks.
For instance, if you intend to invest your funds for a long period, you may be able to take a more risky type of investment funds such as the growth or aggressive fund. If you intend to withdraw your funds soon, you should invest in a less risky fund to ensure your investment doesn’t drop in value.
3. Ignoring the Fees and Taxes
Most KiwiSaver contributors fail to consider the fees they’re paying for their type of investment fund. Higher fees may leave you with very little returns. Also, when it comes to taxes, ensure you get the PIR rate right to avoid paying higher taxes.
4. Choosing a Fund Based on Historic Performance
Past fund performance shouldn’t be the predictor of future performance. This means that you shouldn’t invest in any type of investment fund just because it performed well in the past. When it comes to investment, it’s almost impossible to predict the performance based on historic performance.
5. Failure to Maximize the Government Contribution
The annual contribution made by the government is one of the benefits of being a KiwiSaver. When you save at least $1,042.86, you get the maximum government contribution of $521.43. Always check your contribution before the end of May to ensure you qualify for the maximum government contribution.
Conclusion
In conclusion, KiwiSaver is a great way to invest in your first home or your retirement. You get to benefit not only from your voluntary contribution but from your employer’s and the government’s contribution.
However, it’s important to stay on top of your KiwiSaver. Ensure you’re on the right fund and your contributions are up to date. Also, check if you’re paying higher fees or taxes than necessary. If you intend to use your KiwiSaver savings to buy your first home, ensure you talk to home advisors who can guide you on the options available for you. At Vega Mortgages, we can help you buy your first home with your KiwiSaver Savings. We have qualified and skilled advisers who not only seek to advise you but also support you in your home ownership journey.
