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Oily Rag Column for 8 July 2013

KiwiSaver makes sense

By Frank and Muriel Newman

We are often asked about KiwiSaver. To us, it makes good sense and is something serious savers should get into if they have not already done so.

KiwiSaver rules keep changing, so we thought it worth going through the advantages of the scheme.

The reason we are pretty keen on KiwiSaver is because the words “free money” come up time and time again. There are some pretty good financial reasons to open a KiwiSaver account. Firstly, the government will give you $1,000 to “kick-start” your fund. Yes, $1,000 for free!

But that’s not the end of the free money. When you start contributing, they will also give you up to $10 a week ($521 a year) as a tax credit.

But, there’s more. If you are employed (and over the age of 18) your employer will be required to put in 3% of your salary into the fund. That’s on top of what they pay you already.

In other words, there’s a lot of other people’s money going into your KiwiSaver account - for you to keep! Self employed people can also receive those benefits, but of course not the employer contribution.

The thing is, anyone of any age can open a KiwiSaver account and benefit from the $1,000 kick start and tax credit. For example a grandparent could open up a KiwiSaver account for a newborn with a deposit of say $10. The government will put in $1,000. Even if no more contributions are made until the child starts work at say age 18, the $1,000 will grow through the investment returns!

KiwiSaver is not all roses and chocolates, however.  There are a few negatives. The main one is that KiwiSaver is a superannuation scheme and so savings are locked in until the age of 65. Those wanting to retire before then will need to save and invest elsewhere. The other negative is that KiwiSaver funds are not guaranteed and there is no guarantee about performance. So far the performance has been a bit patchy and in the long run the returns are not likely to be spectacular, but against this the amount of free money going into the account is likely to counter this.

To a 20 year-old, 65 will seem like an eternity away, but they can “unlock” their KiwiSaver funds to buy their first home. Not only that, the Government will give more free money (up to $5,000) to help with the purchase – per KiwiSaver account (so a couple could receive up to $10,000 for free!).

That means a couple who have not owned a home could both opt into KiwiSaver, put in 3% of their salary for 5 years, then use their contributions, plus their employers’ contributions, plus the $5,000 subsidy to purchase their first home. For most people that will be tens of thousands of dollars in free money.  

There are a few conditions:  they must be in Kiwisaver for at least 3 years and the funds can only be used to buy a “cheaper home”, which they must live in for at least six months.

The tough economic times are making it harder for people to make ends meet, and much harder to put together enough money for a deposit on a first home. Having funds in a KiwiSaver account makes it a little easier, and lots of people have already taken advantage of the scheme. According to recent media reports, last year 10,733 people drew on their KiwiSaver accounts to put a deposit on their first home. That figure is likely to keep growing, providing welcome support for first home buyers.    

As from 1 July this year, new rules have come into effect requiring KiwiSaver providers to publish quarterly and annual performance disclosures. It also requires a consistent approach to the calculation of those performance measures – making the results more transparent and less prone to manipulation. 
Do you have a favourite tip you would like to share with readers? If so, please send it to us at www.oilyrag.co.nz or write to Living off the Smell of an Oily Rag, PO Box 984, Whangarei.

*Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips on-line at www.oilyrag.co.nz. The book is available from bookstores and online at www.oilyrag.co.nz.

ENDS

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