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What Are The Key Features Of National's KiwiSaver Law?

Contributor:
Mary Holm
Mary Holm

Question:

With the new changes to KiwiSaver, "contributions to KiwiSaver will be lowered to 2 per cent of the weekly wage, matched by Government", the Herald said this week.

"However, the changes (proposed before the election) meant those earning under $52,000 would not get near the $1040 subsidy cap before they reached 2 per cent of their income."

This week, "Mr English said instead of limiting the subsidy to 2 per cent of wages, there would be a dollar-for-dollar subsidy of up to $1040 for low and middle incomes."

Does this mean that scheme members can elect a 2 per cent deduction from their wages to put into the scheme, and if this amount is less than $1040, they can manually top up their contributions with a sum equal to the difference to ensure they get the maximum $1040? 

Yes. And thank goodness for that. This was the big flaw in National's earlier version of how it would change KiwiSaver.

Answer:

Mary Holm: Under the earlier plans, employees were stuck with a maximum tax credit of 2 per cent of their pay, which led to odd situations. For example, a beneficiary could contribute $1040 and receive an equal tax credit. But if he or she took a part-time, $80-a-week job, the maximum tax credit would be just $83.20, regardless of how much he or she contributed.

The new version - passed into law by Parliament this week - brings lower-paid employees in line with the self-employed and other non-employees, who can contribute as much as they like up to $1040 and it will be matched by the tax credit.

The other new KiwiSaver change is that the $40-a-year fee subsidy will end next April 1. This makes the scheme a little less attractive for everyone - but by no means to the point that it's not worth being in.

Those most likely to notice the difference are parents of children signed up for KiwiSaver. Because children don't get a tax credit until they turn 18, many parents have opened accounts so their children get the Government's $1000 kick-start but are making no further contributions.

Under current KiwiSaver rules, those accounts would generally be expected to grow over the years, with returns and the fee subsidy usually more than offsetting fees and taxes. But when the fee subsidy ends, accounts with no ongoing contributions are more likely to decrease in value.

Nonetheless, even if the $1000 dwindles over the years, it's highly likely to be worth at least several hundred dollars by the time the child turns 18 and, hopefully, starts to contribute. It's still money for nothing.

The other changes to KiwiSaver are the same as announced before the election. They include:

  • Compulsory employer contributions will still rise from 1 to 2 per cent next April, but they will no longer rise to 3 per cent in 2010 and 4 per cent from 2011.
  • The employer tax credit - a reimbursement of their contributions up to $1040 per employee - will end next April.
The tax exemption on employer contributions, currently up to 4 per cent of employees' pay, drops to 2 per cent next April. More on this in the next Q&A.
  • No employee's pay can be cut because they join KiwiSaver. But the Government will permit employers to negotiate - in good faith - contracts under which non-KiwiSavers receive bigger pay rises to compensate for not getting KiwiSaver employer contributions. KiwiSavers will miss out on that extra money, so they will, in effect, be paying their own employer contributions.

While the last change might seem tough on KiwiSaver employees, the current prohibition on such contracts is tough on their non-KiwiSaver workmates. In any case, no employee KiwiSaver will end up worse off than non-employee KiwiSavers - except that they have less flexibility in their first year of membership. And given that from April they will have to contribute only 2 per cent of pay for that first year, that shouldn't be too difficult for most people.

 

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.      

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