While KiwiSaver has been with us now for ten years it remains that many New Zealanders are not making the most of the scheme. These four basic steps are a good start to grow your retirement savings.
1. Join – it goes without saying, for most New Zealanders the additional benefits of KiwiSaver makes joining a sensible option. KiwiSaver is not only for employees, those who are self-employed can also enjoy the benefits of KiwiSaver.
2. Contribute enough – at the very least you should be contributing enough each year to maximise the Member Tax credit that is available. This means contributing at least $1,042, either via your wages as employee contributions, or directly to your scheme by a lump-sum or regular direct debits if you are self-employed. You will reap the rewards of a $521 Member Tax Credit. What other investment could offer you such a good boost to your savings?
3. Be in the right fund – new members are often directed initially to a default investment fund. These funds aim to provide stable returns and build confidence in KiwiSaver while members actively consider the best funds for their individual circumstances. Unfortunately many KiwiSaver members remain in these low risk and low return funds without making an active choice. This can have a significant impact on the growth of their savings. For a self-employed 30 year old contributing just $1,042 a year, moving from a Default to a Balanced Growth investment fund could mean the difference between $101,000 or $158,000 at age 65*. This dramatic difference is enhanced by the power of compounding returns, especially for a younger KiwiSaver member with a longer investment timeframe. (*Based on ANZ OneAnswer KiwiSaver Scheme long-term return assumptions.)
4. Have the correct tax rate – this is known as the Prescribed Investor Rate (PIR) and for the purposes of KiwiSaver investments will be either 10.5%, 17.5% or 28%. The correct PIR to use will depend on your lowest taxable income in either of the previous two income years. When a PIR rate is not advised to the KiwiSaver scheme provider they must apply a default rate of 28%. This can mean that you are paying more tax than you should, which has the same effect as reducing your investment returns. This form of tax has simplified the taxing of investment returns, but it is a final tax and an overpayment of tax cannot be refunded via a tax return. That is why it is so important to get the rate right.
Getting these basics correct is vital to making the most of KiwiSaver. If you have any queries about these points please contact your adviser for guidance.
This information is general. A Disclosure Statement is available on request.