KiwiSaver: what you need to know

From July 1, the government will encourage Kiwis to save 4% or more of their income in the KiwiSaver scheme. Sunday Star-Times money editor Rob Stock gives you a guide to the retirement savings scheme.

Do I really have to join KiwiSaver? No, but you'd be a fool not to. Michael Cullen is so keen to reverse the country's lamentably low levels of personal savings that he is throwing money at the scheme. There's a $1000 sweetener for every new account, $40 towards account fees each year, and contributions of up to $20 a week ($1040 a year) for those saving regularly. Employers will have to make contributions as well, starting at 1% of your salary next year, then 2%, 3% and 4% in the following years. Plus there are various leg-ups being offered to help people buy their own home.

OK, how will KiwiSaver help me get on the housing ladder?

From 2010, if you have been diligently paying 4% of your income into a KiwiSaver scheme, you may be eligible for a chunk of cash from the government to go towards the deposit on a first home - $1000 for each year you've been saving, up to a maximum of $5000 (that's $10,000 for a couple). Details aren't finalised, but you'll need to be not too rich (earning below $100,000 a year for a couple or $140,000 for a household) and you'll need to buy a house that's among the cheapest 25% in that area. There'll be strings attached to prevent you from abusing the system for a quick buck.

What's this mortgage diversion thing, and will it be any use to me if I've already bought my first home?

"Mortgage diversion" exploits the fact that for most homeowners, paying back a mortgage is just about the best investment they can make. Half of your contribution can be diverted to your mortgage, but you will keep collecting employer and government contributions based on the whole sum you contribute. This is a wise use of your money, whether you've just bought your first home or are paying the last few dollars on your fifth.

My parents are going to lend me $50,000 to help with the deposit on my first house. Will that kill my chances of getting a first-home-buyer subsidy?

Hard to say, but there's nothing in Cullen's Budget to indicate that it would.

If I don't bother with KiwiSaver, isn't NZ Super enough to live on?

NZ Super for an individual living alone is $277 a week, after tax. Frightening, isn't it? I plan to retire at 55. Will I be able to get at my KiwiSaver savings then?

You can't touch a bean until you're 65, and it could get worse. KiwiSavers are locked up till the age they can draw NZ Super, and there's nothing to stop a future government pushing that out to 67.

Once I've paid my bills and rent each week, I don't have a cent left for savings. How is KiwiSaver going to help me?

Let's be brutal about this. Cullen is dangling a big carrot, but it's up to you to reach up and take a bite. So take a deep breath and help yourself. Manage your money better. Get a second job. Sell a car and take the bus. If you are unable to start saving now, make a plan to be on a financial footing to do so by this time next year.

What happens if my marriage breaks up?

Super savings are part of relationship property and they can't be held in trust, so the family court can divide them as it sees fit. Creditors can also get at your account.

What if I die young?

Your estate will get the money. Make sure you update your will to say so to avoid costly probate.

Do I still have to contribute to KiwiSaver if I run into hard times?

No. As long as you stick with it for the first 12 months, you can then take a contributions holiday of up to five years. In cases of extreme financial hardship or serious illness, the trustees of your fund can free up cash for you, though they decide how much, not you.

I'm a stay-at-home mum slogging my guts out for no money. Can I have a KiwiSaver account?

Yes, and you'll also get the $1000 sweetener and the $40-a-year fee subsidy. As long as you put in at least $20 a week you'll pick up $20 from the government too, though as 4% of your zero income is zero, you could put in even less, (though your fund company will probably require a minimum of $50 a month). Even children can have a KiwiSaver account and get the $1000 sweetener, but they won't get $20 a week from the government.

What if I am on paid parental leave or receiving ACC payments. Do I still get top-ups from my employer and the government?

Employers don't have to match any contributions you make from your paid parental leave (which is paid by the IRD) or from ACC payments. However, the government will still chip in up to $20 a week.

I want to go on an OE. What happens to my KiwiSaver?

Contributions stop when your employment does. You can make deposits from overseas, but there'll be no subsidies. If you permanently emigrate, your KiwiSaver savings can be released, but the government will claw back its $20-a-week contributions.

My employer already makes good contributions to my work pension, and I'll get all my money back when I change jobs, rather than waiting till I'm 65. Should I bother with KiwiSaver?

Yes. Remember the free money. You could open a separate KiwiSaver account, but chances are your employer will switch some or all of its scheme to a KiwiSaver scheme anyway. Your employer is obliged to explain all the options to you.

How do I decide which provider of a KiwiSaver account to use?

All the banks and various fund managers will offer accounts, and you can go where you like, but if you can't make up your mind, you will be allocated one of six government- approved providers (or your employer may nominate a preference). As with any long-term investment, remember that over the long term shares and property investment do well, not cash.

Will the government bail me out if the bank holding my KiwiSaver account goes belly up?

Super funds are pretty safe, and if a scheme is being badly managed, the government will step in to manage it. Investments do go up and down, so there may be times it looks like you have made losses.

I'm self-employed. Can I still join KiwiSaver?

Yes, and you get the subsidies, though you have no employer to make contributions for you.

I turn 65 in August. Can I join KiwiSaver in July, get my $1000 kickstart from the government then withdraw it all a month later?

No. Your money's locked up for a minimum of five years.

Just how sick do I need to be to get my money out of KiwiSaver before I reach 65, and will I need a sick note from my doctor?

Pretty sick, and yes. A terminal diagnosis will release the cash. Also, if you are struggling financially, it would be released, at least in part.

Is there a simple way of working out exactly how much my KiwiSaver pension will be worth on the day I turn 65 and how much I should put into it?

Not exactly. Salaries go up and down and investment returns vary. But you can take a stab using the online calculator at www. from tomorrow. A middle-income saver for 35 years could expect, if things go well, to have a nest egg of $300,000 by 65, which could safely generate an income of $15,000 to $20,000 a year.

OK, I'm convinced. Show me where to sign up.

Hold on. You can't join KiwiSaver until July 1. If you're employed your boss will be doing most of the legwork and channel your contributions via the IRD, otherwise approach your bank, fund company or local credit union.

Sunday Star Times