The Investor A Year Of Change For Kiwisavers – And Would-Be Joiners

First, the contributions. There are two changes:

• From April 1, employer contributions will be taxed. The tax rates will be similar to income tax, but based on the total of employee taxable income plus the employer’s KiwiSaver contributions.

If your total is $16,800 or less, employer contributions will be taxed at 10.5 per cent. If your total is $16,801 to $57,600, the tax will be 17.5 per cent. At $57,601 to $84,000, the tax will be 30 per cent, and above $84,000 it will be 33 per cent.

That means, for example, that someone on $30,000 whose employer currently contributes $600 a year will see that drop to $495 – with the rest going to Inland Revenue. And for someone on $70,000, the employer contribution will drop from $1400 to $980.

• From July, when the annual tax credits for the year ending June 30 are paid into KiwiSaver accounts, the credit will halve from a dollar for every dollar the member contributes, with a maximum credit of $1043, to 50c for every dollar the member contributes, with a maximum credit of $521.

The two changes will slow the growth of KiwiSaver accounts. But the scheme is still worth being in.

And employees will gain back some of their loss next year. From April 2013, the minimum employer and employee contributions will both rise to 3 per cent of pay. While increasing their contributions may challenge some employees, most should cope fairly easily. And the boost in employer contributions will more than make up for the taxation of employer contributions this year.

That brings us to why employees who haven’t yet joined might want to join now.

As an employee, when you sign up you commit to contributing for at least a year, unless you strike financial hardship. If you join before April 1 this year, you’ll have to put in 2 per cent of your pay for a year. But if you wait, during at least part of your first year you’ll have to put in 3 per cent.

Of course the designers of the scheme hope people will continue to contribute after 12 months, having got into the habit. Is it a good idea to keep putting in money?

The first year in KiwiSaver is exceptionally good, because you get the $1000 kick-start. After that, it’s still worthwhile if you have no debt.

However, anyone with credit card or other high-interest debt would do best, after their first year, to take a contributions holiday and transfer their KiwiSaver contributions into getting rid of that debt. Restart contributions after that.

What about people with mortgages? Continuing to contribute to KiwiSaver used to beat making extra repayments off the mortgage. But the lower tax credit and new tax on employer contributions make it less clear cut. We’ll look at that in the next column, in two weeks.

Turning to the over-65s, from July this year people who joined KiwiSaver at the start and were over 60 at the time, will be able to start withdrawing money from their KiwiSaver accounts.

You don’t have to take any money out, but you are free to withdraw some or all, in whatever pattern suits you. We’ll consider what might work best for you a bit later this year.