How KiwiSaver works and why it’s worth having

How does KiwiSaver work?

KiwiSaver is an optional investment scheme set up by the New Zealand Government to help New Zealand citizens and permanent residents save for retirement. You are able to contribute 3%, 4%, 6% 8% or even 10% of your salary to KiwiSaver and can also make voluntary contributions.

KiwiSaver funds are typically invested in a range of assets such as shares, bonds, and property. Members can choose from various fund types based on their risk tolerance and financial goals. There are generally five different types:

-       Defensive

-       Conservative

-       Balanced

-       Growth

-       Aggressive

The difference between these funds is the difference in allocation to Growth and Income assets. Growth assets include things like shares and property while Income assets include things like bonds and term deposits. The Defensive and Conservative funds have higher allocations to Income while the Growth and Aggressive funds have higher allocations to Growth.

Normally, the funds in a KiwiSaver account are locked in until the age of 65. However, there are some specific situations where members can access their funds earlier, such as buying your first home, significant financial hardship, or if you are diagnosed with a terminal illness.

Why is it worth having?

Government contribution

The government will contribute up to $521.43 per year until you’re 65. To receive this full contribution you must contribute at least $1042.86 but even if you are contributing less than this you will still receive 50 cents for every dollar you put in. This incentive means that $1042.86 of your money is immediately earning a 50% return.

• For a 25-year-old receiving this contribution until they are 65, and receiving a rate of return of 7.5% on this money the Future Value will be over $130,000.

• For a 40-year-old in the same circumstances, the Future Value will be over $40,000.

Employer contribution

If you are contributing 3% or more then employers are required to contribute 3% as well. This is in addition to your base salary and so can effectively be treated as a 3% pay rise as soon as you join KiwiSaver.

Tax benefit

Your investment earnings are taxed at your Prescribed Investor Rate (PIR). Under the PIR scheme investors pay tax at an equal or lower rate than their marginal rate, giving them more benefit from their contributions.

For example, the maximum PIR is 28%. This means that if your income is above $48,000 a year there is a tax benefit to you having KiwiSaver because your earnings are taxed at 28% rather than your higher marginal tax rate of 30%, 33%, or 39%.

Regular savings

Saving can indeed be challenging, especially in the face of a cost of living crisis. With increasing expenses for everyday necessities, individuals often find it difficult to set aside funds for their long-term financial goals, such as retirement or purchasing their first home. However, KiwiSaver offers a vital solution that empowers people to continue building their financial future, even during tough times.

Regular saving also means that while markets are underperforming, they will be worth less and your KiwiSaver contributions will purchase more units in them. Conversely, when the funds are worth more your contributions will purchase fewer units in them. The effect of this is that your contributions can make a large return even in volatile and underperforming markets. For a fuller explanation on the genius of regular saving please see this article.

If you would like our team to provide you with a complimentary KiwiSaver report then please see our KiwiSaver Discovery Quiz.