When most Kiwis turn 65 they are entitled to the NZ superannuation which is a pension that is paid fortnightly. However, the value of NZ superannuation payments vary depending on individual circumstances. In most cases, it is less than what people are generally used to living on before their retirement. Thus, to help people with a more comfortable retirement, the government launched KiwiSaver.
How does KiwiSaver Work?
KiwiSaver is a voluntary savings scheme so you can choose how much you want to contribute towards your retirement. You can choose from 3%, 4%, 6%, 8% or 10% of your gross income (before tax) wage or salary regularly. In most cases your employer will then match part of your contribution.
The money is then invested on your behalf by a KiwiSaver provider into a KiwiSaver fund of your choice. There are different types of KiwiSaver funds ranging from Cash to Aggressive funds. We’ve explained the different types of KiwiSaver funds in this 2 min video.
Benefits of KiwiSaver
KiwiSaver is voluntary, but it does have some significant financial benefits that are designed to encourage you to invest in it.
Firstly, the government contributes 50 cents for every dollar you contribute each year into your KiwiSaver account, which is called a ‘member tax credit’. The maximum contribution from the government however is capped at $521 per year. Still, it's five hundred bucks of free money for you!
The other, most significant incentive towards having a KiwiSaver is that it usually requires your employer to contribute a minimum 3% of your gross salary to your KiwiSaver account. Your employer and government contributions work alongside your contributions to boost your savings.
Thirdly, since your money is invested partly in the stock & bond markets, you will earn investment returns which can add up to a lot over time.
That's why KiwiSaver is more effective in helping you meet your retirement savings goals than just keeping money in the bank.
What's the catch?
As KiwiSaver is meant for your retirement you can’t start spending it until you are 65 years old. However, you can withdraw money in special situations, one of them being buying your first home.
If you have never owned a home and you have been a KiwiSaver member for more than three years, in most cases you can withdraw all the money from your KiwiSaver account early. However you must leave a minimum balance of $1,000 plus any amount transferred from an Australian superannuation fund in your KiwiSaver account.
If you meet the requirements, you can also apply for a HomeStart grant which could get you more money from the government.
- Up to $5,000 if you're buying an existing home ($1,000 per year of contributions); or
- Up to $10,000 if you're buying or building a new home ($2,000 per year of contributions).
Furthermore, you can also make a withdrawal from your KiwiSaver if you fall terminally ill or are suffering from significant financial hardship.
How do I decide which KiwiSaver Fund to choose?
Most KiwiSaver providers offer a range of choices and choosing the right fund is one most important decisions you need to make when planning your retirement. Being in the right fund means you can achieve your first home or retirement income goals more successfully.
The important point to note here is volatility. Watch this 2 min video to understand what volatility is and how it affects your KiwiSaver investment.
Some funds offer higher potential returns, with higher volatility - while other offer more stable but much lower returns. Before you choose a KiwiSaver fund, it's important to know what the returns you require are, what your capacity to endure volatility is and also how comfortable you are with the ups and downs which are part of investing, also called your volatility tolerance.
You can find this yourself, we’ve got blog posts explaining the process or you can have a company such as National Capital do it for you. We help our clients figure out their returns required, volatility capacity and volatility tolerance and then use that information to recommend the appropriate type of fund for them.
We also research over 100+ KiwiSaver funds from different providers and schemes to recommend which provider is most appropriate for you.
This process is very simple and can be done online. Start off by taking our KiwiSaver HealthCheck.
So, should I join KiwiSaver?
To sum it all up, KiwiSaver is an easy and affordable way to help people save extra money for their retirement or help them buy their first home. Most of us can benefit from joining a KiwiSaver scheme if we have not already.