Have you checked through your KiwiSaver login account lately? Is the balance not quite where you need it to be?
There are multiple ways of growing your KiwiSaver account, and we’ll discuss some of them here. This article focuses on what you can do directly to boost your KiwiSaver balance regardless of fund performance. In particular, we will break down the best times to consider making additional contributions in correlation with your goals.
One of the first decisions you need to make when signing up for KiwiSaver is your contribution rate. Most of your KiwiSaver contributions will usually be deducted from your salary or wage. The minimum rate is 3% of your pre-tax salary which is also labeled as the default rate. However, if you wish to, you can contribute as much as 10% of your salary.
You can also take advantage of the yearly government contribution. This is automatically added to your account each year if you meet certain criteria. You can read more about it below and find out just how much you can gain in government contributions.
Moreover, we will discuss the ability to make voluntary contributions to your KiwiSaver account. This can be a great way to strengthen your financial position in retirement but may not be right for everyone. We will go over a few scenarios where additional KiwiSaver contributions make sense and in others not so much.
Lastly, we consider your spending habits and how additional contributions can have both favorable and unfavorable consequences.
There is no cookie-cutter model to a perfect KiwiSaver plan. However, National Capital works hard to keep up to date with the latest KiwiSaver Scheme performance data. Based on this and your own circumstances, we’re able to provide you with free KiwiSaver recommendations.
Your Goals & The Best Times To Consider Additional Contributions
There are two points in your life where it makes the most sense to consider increasing your contributions. That is not to say it’s a bad idea at any other time. But rather point out this is likely the best time as you plan to achieve specific goals in your life.
Firstly, when you’re 18 or just started working you may consider increasing your contribution rate as high as possible. You can also look to make additional lump-sum payments with any savings you have accumulated. Why? Well, this is probably the best time to aggressively start saving for a house deposit. Generally speaking, a young adult with lower financial responsibilities and debt, could afford to make contributions as high as 10%. It has become increasingly difficult for first-time buyers to get into the property market. Therefore, setting the goal as a young adult and actively working towards it will help make it more attainable. And, KiwiSaver is a very good tool to use to build your deposit.
Secondly, you should evaluate your financial situation at least five years before retiring. You need to take into consideration every cost associated with financial freedom post-retirement. Will you have enough to enjoy the lifestyle you’re comfortable with? Will you need to cut back on some of your preferred activities and purchases? Is there something you can do now that will help secure your financial future? The answer is yes, and your KiwiSaver investment is intended to be one of your solutions. If you aren’t happy with your account balance at this life stage, it may be time to increase contributions.
3%, 4%, 6%, 8% Or More?
As mentioned above, when setting up KiwiSaver, you will be asked to choose a contribution rate. This means that a percentage of pre-tax income will be deducted from your salary and transferred to your KiwiSaver account. Unless you want to contribute more, your default contribution is set at 3% before tax. As an employee, this is relatively straightforward as your employer will automatically deduct contributions each pay period. If you are self-employed or under other circumstances, you should talk directly to your scheme provider.
As an employee, you can also choose to contribute 4%, 6%, 8%, or 10%. As we will touch on below, this choice depends largely on your goals, circumstances, and spending habits. However, you do have the ability to change between rates as long as you meet the minimum 3% requirement.
Your pre-tax pay as an employee is your salary/wages including any of the following:
- Bonuses & Commissions
- Extra Salary, Overtime & Gratuities
- Any other pre-tax payment of any kind
Contributions deducted from your salary will continue if you are on regular paid leave or employer-paid parental leave. If you are on government-paid parental leave or general unpaid leave, your contribution will stop automatically. You can keep them going by completing a KS2 form and getting in touch with Inland Revenue and your provider.
Lastly, as a KiwiSaver member who contributes from your pay, generally speaking, your employer has to contribute too. Your employer must contribute at least 3% of your gross pay unless you’re under 18, not making contributions, or not meeting the eligibility criteria. Depending on your remuneration package with your employer, they can choose to make voluntary contributions above the required 3%.
Regular contributions of at least 3% allow you to maximise the government and employer contributions into your KiwiSaver account.
Getting The KiwiSaver Government Contribution
Each year after joining KiwiSaver, the government will contribute up to $521.43 to your account. If you meet certain criteria, you do not need to do anything to claim this contribution. Your KiwiSaver provider will do this automatically for you.
To qualify for the government contribution each year, you must have contributed at least $1042.86 yourself. As long as it is done between the 1st of July and the 30th of June, frequency doesn’t matter.
You can contribute in three ways:
- Salary or wage deductions
- Direct payments to Inland Revenue
- Direct payments through your KiwiSaver provider
If you don’t contribute to KiwiSaver regularly but would like to take advantage of the government contribution you still can. Allow for processing time and make a lump sum payment of $1,042.86 before the 30th of June. It’s as easy as that. Of course, you need to have been registered with a KiwiSaver scheme for over a year.
Furthermore, you can still get a partial government contribution without the minimum $1042.86 needed. If you have contributed less than that, you can still get 50 cents for every dollar you put in. For example, if I have contributed $500 to my KiwiSaver account this year, I would get a $250 government contribution.
If you turned 18 or joined KiwiSaver partway through the year, you won’t be eligible for the full government contribution. It will instead be based on how many days you’ve been a member or since you’ve turned 18 within the year.
Typically, if you qualify, you should see the government contributions in your account by the end of July. With delays, it may take until the end of August at the latest.
For the most up-to-date information on government contributions, you can check out IRD’s webpage on the topic.
At any time, you may want to top up your KiwiSaver account with voluntary contributions. These contributions can come in lump-sum payments or at regular intervals. That is completely fine and you are able to do voluntary payments directly through your scheme provider. That is the quickest way to transfer and see your additional contribution on your account balance. However, you can also make payments through your Inland Revenue account.
Most KiwiSaver providers will also accept regular top-up payments to your KiwiSaver. These are essentially the same as one-off payments but set in regular intervals of your choosing. Typically, you can choose to make payments every week, fortnightly, or monthly intervals through a direct debit.
You must keep in mind that once you’ve made a voluntary payment, it’s locked in until you’re eligible to withdraw. Therefore, you can’t pull out your savings until you are eligible. Typically, when purchasing a first home, reach the retirement age, or encounter significant financial hardship.
Your Spending Habits & The Downside Of Making Additional Contributions
If you don’t have a monthly budget, your money will disappear, and you won’t know where it went. Something here and a little there adds up and spending without a plan can put pressure on your finances. Additional KiwiSaver contributions can help you create a better structure and plan with your money.
As we’ve mentioned before, you can only withdraw your KiwiSaver funds under very limited circumstances. Unlike your savings account, you can’t just withdraw small amounts here and there when you want to. For this reason, it may just be the best way to save more money. There isn’t a temptation to yo-yo money in and out because the system doesn’t allow for it. Thus, if you want to save more but struggle with the temptation of accrued wealth, additional contributions are worth considering.
Self-discipline is hard to come by and we can all slip up sometimes. I can certainly vouch for one too many convenient food delivery orders now and again. Therefore at certain times where you are working towards buying your first home or retirement, the structure in place helps.
If you’re already a good saver you may consider other forms of investments. However, at the two life stages touched on above, adding to your KiwiSaver egg nest is one of the best ways to narrow your focus and reach your goals.
However, this is really a double-edged sword. We’ve established you can only withdraw your contributions when purchasing your first home or hit the age of retirement. Thus, if another investment opportunity does come along and you need to withdraw this capital, you can’t do so.
To conclude, there are three ways to increase your KiwiSaver contributions. Increasing your personal contribution rate, taking advantage of government and employer contributions, and additional voluntary payments. Each one of these methods impacts the other two directly or indirectly.
We discussed the two best moments to consider increasing your contributions. One is during your young adulthood if your goal is to buy your first property. The second is around five years before retirement to ensure you’re comfortable with your lifestyle beyond retirement. That is not to say, those are the only times where you should consider increasing your KiwiSaver contributions. If you are in a position in your life to invest excess capital, KiwiSaver is always a great option.
Lastly, we can’t ignore the downside of making additional KiwiSaver contributions. Your savings are essentially stuck in there until you are either buying your first home or retiring. Can that money be better invested elsewhere?
This article, in particular, has focused on the methods and important life stages when considering additional KiwiSaver contributions. We have not mentioned market trends or dived too deep into unique circumstances. However, you can complete our short questionnaire to get KiwiSaver recommendations tailored to you. If you wish, you can then opt-in to a free call with one of our advisors. You may even consider switching KiwiSaver schemes to one more aligned with your goals and we’re here to help.