KEY POINTS:
New Zealand is a nation of spenders not savers: last year we spent $1.15 for every $1 earned, and the country was ranked 108th out of 131 for its national savings rate in a global economic competitiveness survey.
Those figures don't bode well for the estimated 20 per cent of the population expected to be of retirement age in 2020. Last year, the Government introduced KiwiSaver, a voluntary work-based savings scheme aimed at helping New Zealanders save for their retirement, and latest figures show that 400,000 people have signed up.
Money saved in KiwiSaver schemes is invested in financial assets, and will help make New Zealanders less reliant on residential property for their nest egg. The investments should also generate funds to invest in companies that will, in the long term, help keep the economy rolling.
You are eligible to join KiwiSaver if you're under 65, you normally live in New Zealand, and you are a New Zealand citizen or entitled to live here indefinitely. To kick-start your savings the Government will gift you a $1000 tax-free lump sum. To help you save, it is also proposing to give you a 'tax' credit of up to $20 a week($1040 a year), and pay part of the cost of your KiwiSaver scheme's fees. Your employer will also have to contribute to your savings.
Before you sign up there are a few things to consider:
1. Can you afford the regular contributions? If you join, four per cent or eight per cent of your before-tax pay will be deducted from your take-home pay and sent to your KiwiSaver account, and, with a few exceptions, can't be touched until you turn 65. Employees can take a contributions holiday after their first year, and everyone who is not an employee can stop contributing whenever they want.
As Herald Money columnist Mary Holm points out, however, to make the most of KiwiSaver, you should make sure that in every year starting July 1 and ending the following June 30 you have contributed at least $1043. That's because, on every June 30, each KiwiSaver provider will send a list to Inland Revenue of its members' total contributions in the July-June year.
For everyone who has contributed less than $1043, the Government will match their contribution dollar for dollar with the 'tax' credit. For everyone who has contributed $1043 or more, the government will put in $1043.
2. Do you already have a savings scheme? You can join KiwiSaver even if you do have another retirement fund, and you may be able to transfer your existing savings into a KiwiSaver scheme. Your KiwiSaver fund manager or employer should be able to tell you that.
3. How much money will you need to ensure a reasonable standard of living in retirement? According to Consumer.org, a couple on NZ Super gets just over $420 a week after tax and a single person living alone gets just under $280. Could you live comfortably on that for, say, 15 or 20 years if you have no other income?
4. Do you want to pay off other debts first? Before KiwiSaver, it was generally a good idea to pay off debts such as a mortgage, hire purchase or credit card first, but the incentives to join KiwiSaver may have changed that. You may be able to use some of your KiwiSaver contributions to pay off your mortgage.
5. How much risk are you prepared to take? Some schemes will invest conservatively to protect your capital while others will take a few more risks with the aim of achieving long-term growth. The type of investment you choose will depend on several factors including how close you are to retirement.
6. How big are the scheme provider's fees? Fees on savings schemes can vary widely. High fees can nibble into your savings, and over a period of 10 or 20 years, a small difference in the percentage of fees charged can make a big difference to yourt total savings.
7. Are you self-employed? If so, you'll need to make the contributions yourself, and you'll have to agree with your provider about how much and how often you'll pay into the scheme.
8. Do you have more than one job? You can choose which job or jobs you contribute from. If you take on an additional job after joining KiwiSaver, you'll have to contribute from that job for at least 12 months; after that you can take a contributions holiday. When you change employers, you take your KiwiSaver scheme with you. New employees are automatically enrolled.
If you change jobs but don't want to be in KiwiSaver, you can opt out (unless you have opted in at a previous job). However, you can only opt out in the two to eight weeks after you start the new job.
9. From April 2008, employers will also have to contribute to their employees' KiwiSaver accounts. Initially, employer contributions will start at one per cent, rising to four per cent of gross salary by 2011 - partly offset by a tax credit. Also, any growth in your savings- through interest and dividends on investments - is taxed while it's in your KiwiSaver account. So when you come to withdraw your savings at age 65, the payout will be tax-free.
You can choose which KiwiSaver provider to save with and the type of scheme you want to invest in. If you join KiwiSaver but don't choose a scheme, you'll either be enrolled in the scheme your employer has chosen or in a default KiwiSaver scheme. If you're not happy with your KiwiSaver scheme you can apply to change it, but you can't belong to more than one at a time.
