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Key Questions About KiwiSaver

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Sorted.org.nz
Sorted.org.nz

Get the answers to some key questions about KiwiSaver:

 

  • When should I seriously consider KiwiSaver?
  • What if I'm in an existing scheme?
  • How will I know what kind of investment fund to choose?
  • What if I need financial advice?
  • Should I pay off debt or save in KiwiSaver?
  • What is a PIE?

When should I seriously consider KiwiSaver?

Some situations in which you should seriously consider joining KiwiSaver are when:

  • You can afford to contribute 4% of your pay. If you’d like help with a budget try out the Sorted.org.nz budget calculator or call 0800 SORT MONEY (767 866) to speak with a budget adviser.
  • Your employer will contribute more than the compulsory amount to your KiwiSaver account.
  • You plan to buy your first home any time after the next 3-5 years, and you expect to be eligible for the first home subsidy.
  • You are over the age of 60, but not yet 65.
  • You know it’s time to start saving for your retirement.

If you can afford 4% of your pay and you don’t mind the funds being
locked in until you're 65, or older, then KiwiSaver could provide an
easy and affordable way to save for your retirement.

Keep in mind that KiwiSaver won’t suit everyone. There are other
savings options which may be more flexible and work better for you.

If you’re contributing to an existing retirement savings scheme seek
independent advice about whether KiwiSaver is right or wrong for you.
Your existing scheme may for example be employer-subsidised, and/or
allow member tax credits and tax-free employer contributions on terms
which correspond to KiwiSaver.

What if I’m in an existing scheme?

If you’re already a member of (or you’re able to join) another
superannuation scheme to which your employer will contribute, you need
to compare the benefits, fees, service levels and potential returns of
that scheme and a KiwiSaver equivalent.

What if I need financial advice?

If you need professional financial advice, read the Sorted.org.nz advice checklist. 

How will I know what kind of investment fund to choose?

Try the Sorted.org.nz Risk recommender calculator to see what type of risk – low, medium or high – you are comfortable with. Then use their Investment recommender to see what types of investments might suit.

See Funds and schemes to find out which organisations offer KiwiSaver schemes for each fund type - conservative, moderate, balanced, and growth.

Use the Sorted.org.nz KiwiSaver fees calculator to see what fees are charged by KiwiSaver providers.

Should I pay off debt or save in KiwiSaver?

Before KiwiSaver, you were usually financially better off to pay off
debt before putting money into a retirement savings scheme. The reason
for that was simple: the after-tax investment income you would earn on
your savings wasn’t as much as the interest you were paying on your
debt.

With KiwiSaver, the old rule changes. Now, even if you have debt you
may be better off financially joining KiwiSaver because of the
incentives:

  • A $1,000 ‘kick start’ contribution from the government when you join.
  • A
    matching ‘tax credit’ (dollar for dollar) for the first $1,040 a year
    ($20 a week) of your own contributions (if you are aged over 18).
  • A small annual fee subsidy ($40 a year).
  • A subsidy for first home buyers of up to $5,000 after five years’ membership.
  • Tax-free employer contributions that will increase by 1% of pay a year to a maximum of 4% of pay by 2011. 

It’s still the case that the interest you earn on your savings in
KiwiSaver usually won’t be as much as the interest charged on your
debt. However, the difference won’t, in nearly all circumstances, be
enough to out-weigh the financial benefit you will get from these
incentives – which you will get only if you save through KiwiSaver.

Of course, that’s purely a financial argument. You may feel more
comfortable joining KiwiSaver while continuing to pay off your debt as
fast as you can, if you can afford to do both. Or you may simply prefer
to get rid of all your high interest debt before you start saving for
your retirement, full stop. Just don’t be put off joining KiwiSaver
because you have debt.

Another option, if your scheme provider offers it, would be to
divert up to half your KiwiSaver contributions to repaying your
mortgage (possible after 12 months of contributions). As long as you
contribute more than the $20 per week to your KiwiSaver account, you’ll
still get all the incentives.

To work out your options and see how the numbers stack up, try the Sorted.org.nz KiwiSaver Decision Guide. 

What is a PIE?

The government has set up new tax rules for New Zealand-based
managed funds. Under these rules, if a superannuation scheme is a PIE,
or Portfolio Investment Entity, there will be some important tax
advantages, starting 1 October 2007.

All KiwiSaver default schemes are PIEs, as well as many other KiwiSaver schemes and also non-KiwiSaver superannuation schemes.

While all investors in non-PIE superannuation schemes will continue
to be taxed at 33% within the scheme, lower-income investors in PIEs
will in most cases be taxed at 19.5% on their scheme income.

Furthermore, if:

  • Your non-PIE taxable income is below $38,000 a year, and
  • Your total taxable income - including PIE income - is below $60,000 a year

Then all of your PIE income - including any amount above $38,000 - will be taxed at 19.5%. That's a considerable bonus.

Note that from 1 April 2008, upper-income investors in the 39% tax bracket will pay only 30% tax on their PIE income.

In another tax break, PIEs that invest in New Zealand shares and
many Australian listed shares won't be taxed on capital gains on those
shares, even if the shares are traded frequently. In the past, schemes
that traded frequently did pay tax on that income.

The tax paid by a PIE on your behalf is a 'final' tax.  If you
normally don't file a tax return, you won't have to file one because
you have invested in a PIE.

Each year the PIE will ask you what your tax rate will be for the
coming year, and explain how to work that out. That rate - called your
'Prescribed Investor Rate' or PIR - will be either 19.5% or 30%. If you
don't supply your PIR, the PIE will tax you at 33% (reducing to 30%
from 1 April 2008).

For more information about PIEs and PIRs, visit the Inland Revenue website.

 

Content provided by Sorted.org.nz, Your Independent Money Guide.

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