Government documents show the option of increasing the minimum employer KiwiSaver contribution was rejected in favour of adding new 6% and 10% employee contribution options

The Government has rejected the option of increasing employers' minimum KiwiSaver contribution to 4% and will instead add two new employee contribution rates.

A new tax bill will add 6% and 10% KiwiSaver contribution options and, according to a Government Regulatory Impact Statement (RIS), is likely to have a “positive impact on savings.” It also opens KiwiSaver to people aged over 65 for the first time, although they will not be eligible for the Government's Member Tax Credit of $560 per year.

Last week, Revenue Minister Stuart Nash revealed the Government is moving ahead with the Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill.

It is likely to pass after National’s revenue spokesman Paul Goldsmith confirmed to Interest.co.nz his party would be supporting it.

The RIS outlines the Government’s concern about the low employee contribution rates and the future impact this may have on the economy.

As it stands, KiwiSaver members have contributions deducted at a rate of 3% (the minimum default rate), 4% or 8% from their salary and wages.

But roughly 90% of members were contributing at the lowest 3% or 4% employee contribution rates in the 2016-17 year.

Just 9% of members contribute at 8%, the RIS says.

The 6% and 10% options would give members greater savings flexibility which aligned with their specific retirement savings needs.

“The additional 6% rate would also address the gap between the current 4% and 8% contribution rates, which the Review indicated many members think is too large.”

A KiwiSaver member, with an annual gross income of $50,000, would gain an additional $1,000 a year in savings by increasing their contribution rate from 4% to 6% or from 8% to 10%.

The RSI considered several ways in which the Government could help increase overall KiwiSaver contributions, including increasing employer contributions.

But this option was seen as a lot less favourable.  

“This could detrimentally impact on members and employers’ current financial position and short-term savings,” the report says, adding that there is “limited evidence this recommendation would raise savings rates.”

The idea of adding an automated option to allow members to increase their contribution rate over time was also mooted.

Under this option, members would choose an automated annual increase in their contribution rate of 0.25%, 0.5% or 1% up to a capped maximum rate.

But this option would significantly increase compliance costs for employers, and could require them to modify their payroll systems, the report says.

The new bill will also reduce the maximum period of the contributions holiday from five years to one year. This would limit the time during which members make no contributions to their KiwiSaver. 

The RSI recommended this option to prompt members to resume making contributions sooner, so that they increase their savings and maximise their member tax credit entitlement.

For the year ending 31 June, 2017, 131,710 members were on a contributions holiday, with 84% of these contribution holidays being five years in duration 

The Government is also renaming "holiday contribution" to "savings suspension."

What else is changing?

Many of the issues discussed in the report, including the option to add new KiwiSaver contribution options, were outlined by the Retirement Commissioner’s review of retirement income policies in December 2016.

The Retirement Commissioner, Diane Maxwell, has welcomed the Government’s bill.

“Adding more contribution rates gives members more flexibility and control over their savings,” she says.

“We’ve had many New Zealanders tell us that the gap between 4% and 8% is too large for those able to contribute more, so they feel stuck on the lower rates. Others want the ability to save even more for their retirement,” says Maxwell.

“Following our 2016 Review of Retirement Income Policy we recommended that allowing entry to KiwiSaver to people over 65 would remove a policy inequity, provide another investment option for this age group, and allow employers to voluntarily make contributions for all employees over 65,” says Maxwell. “There is no apparent reason for those over 65 not being able to join KiwiSaver.”

The Bill, which will come into effect in early 2019, also introduces several other changes, including:

  • Providing automatic tax refunds, so IRD will issue people the money they're owed instead of having to apply for it
  • Introducing a ‘short process ruling’ where small businesses can more easily apply for a binding ruling from Inland Revenue on any tax matter
  • Provides the Commissioner of Inland Revenue with more flexibility to deal with minor anomalies in tax legislation
  • Allows over-65-year-olds to join KiwiSaver as a provider of low cost managed funds. Employers would not be obliged to contribute for over-65s but may do so voluntarily
  • Sets the annual tax rates for the 2018-19 tax year, which remain unchanged from previous tax years

Revenue Minister Stuart Nash says the Bill represents a “significant step in the modernisation and simplification of New Zealand’s tax system, supporting much of Inland Revenue’s Business Transformation work.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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46 Comments

Do over 65's get government contributions?

I checked this out after seeing your comment - they will not be eligible for the Government's Member Tax Credit of $560 per year.

Maybe retirees could start using their Kiwi Saver funds as a sort of de facto savings account. Ie ability to invest and withdraw lump sums from time to time. If a provider can offer a better net return than bank term deposits that would boost the income of “seniors” somewhat.

If you invested in ANZs, ASBs, Craigs, FisherFunds etc managed funds (much like any other providers managed funds), then you already have had similar benefits to them managing Kiwisaver. Same risk, same investments, same fees (often there are options with lower fees than kiwisaver). Really the only difference is the employer (aka mostly additional staff wage) contributions, and government contribution. What is a negative is the added restrictions & requirements so that the scheme is not flexible, is not able to be withdrawn in financial & medical emergencies & lacks the ability to be varied in different investment areas.

People choose term deposits only because it is entirely conservative, something which in retirement is usually a desired feature. The option for riskier managed funds has always been available and their performance has always been similar if not often better through diversity & flexibility than Kiwisaver. If the employer is not taking their contribution from your wage, (as is done far more often), then it might be worthwhile to use Kiwisaver for the extra cash. Otherwise you could just as easily take the same amount out of your wages and invest yourself in managed funds run by the same folk as those who run kiwisaver schemes. Sure putting $1042 into kiwisaver each year might be worthwhile if the government contributions were available, but anything more than that it would be a waste behind a locked door with prohibitive restrictions and poor options which you can do far better.

In reality with many employers raiding wages for their end and government contributions limited Kiwisaver is much like an impotent managed fund; you do not get it performing when you need it the most and it will disappoint in bad years and not hold it's value. Hence really look at the options out there. Term deposits are really the conservative tip of a much larger investment body. Sure you can keep looking at only the tip and expect Kiwisaver to be the only other option for better performance or you can look at all the other options there and see Kiwisaver was a crutch for those who often did not have the confidence to go deeper.

From experience I agree with you foxglove, and pacifica you have some errors of fact.
As retirees, my wife and I have a range of investments but are using our KiwiSavers as a vehicle for what are effectively managed funds. Our bank's managed funds do not stack up with KiiwSaver with similar investment profiles.
Firstly, the bank's investment profile KiiwSaver funds have past gross returns that are generally better than the bank's equivalent managed funds.
In addition there are also a number of advantages for KS vs their similar investment profile managed funds. For the moderate to balanced funds that we were looking at; the banks managed funds have a 0.4% entry fee vs nil for KS, their annual management fee for for the managed funds was 1.1% vs 0.6% for a similar KS fund, and while there were no exit fees for the managed funds, to transfer to another managed fund would incur an extra entry fee whereas there is no fee with KS.
There is also an added advantage in that there is greater performance transparency through comparison with other providers' similar funds such as by interest.co, MorningStar etc. This seemed to be not only lacking with managed funds, but also provided a greater degree of accountability.
A considerable advantage of a cash/conservative KiiwSaver fund compared to term deposits is that in an emergency funds can be earning a similar return but is not locked in for a set period and a partial of full withdrawals can be made at anytime without penalty and funds received within five working days which stacks up particularly attractive to term deposits with break fees and time delays.
Coincidentally, I was talking with my sister last weekend and she commented - without prompting - that she regretted withdrawing all her KiiwSaver funds we she turned 65 on the assumption that KiiwSaver served no further value and would love to have kept it for the above reasons.
It is important that retirees see that the value of KiiwSaver post 65 is not for savings, but rather as an investment vehicle.
I know that the banks' financial advisers are unlikely to recommend this as KiiwSaver doesn't provide personal commissions as selling their managed funds do. Pacifca, I wonder if you work for a bank/KiiwSaver provider.

You only looked at one provider of managed funds for comparison, at that a bank?! Wow.

Kiwisaver must be for those not concerned with doing their own due diligence or personal investment, even the comparisons you use are lacking. Even with a three tuple optimisation fit managed funds outperform KS ones quite a bit. Are you aware that the banks have been repeatedly caught in Kiwisaver accounting bungles leaving thousands of NZ investors out of pocket with a lack of transparency, hidden fees and IT failures with little to no recompense until after months long service level jumps. I say this as it was bad tech bungles at the time, and embarrassing for any large bank. Hence your claims of transparency are unfortunately laughable. If you don't look, read disclosure statements, kick the tyres of the tech & see comparison sites then that does not mean they do not exist for managed funds. Actually there are far better comparisons & transparency including better month by month details (easier to pull the data out to other apps as well).

But since many do not leave their comfort bank bubble my comment that Kiwisaver is a crutch for certain people who cannot track year on year remains, along with the others, (after all over 50,000 people missed seeing a core bank bug due to the bad KS interface and poor transparency). If anything I would recommend switching if you are having this much difficulty pulling out the base information, you are losing money even with the same risk and same org. But for the record I would not go with the banks offers either. I can get lower than 0.2% annual fees in one of mine outside of the NZ banks with returns better than the same KS bank fund. I don't normally like to advertise, even give positive brand favouritism, so I do not promote any. I favour thorough mathematical & engineering investigation. But I do find I need to be honest about ineptitude especially in tech & financial matters. I like the server rooms but the front end, back end (and much of the BI & security) leaves a lot to be desired with many NZ banks (especially the Aussie born ones). Leave them even just for the security, transparency & reporting boost, even on the fees vs returns vs risks basis they are not great.

Why on earth a balanced fund in retirement? A 2008 year can be around the corner, more so if you understand what caused the 2008 year, and losing over 15% is a big hit to take that recovers far more slowly and in retirement waiting half a decade to get back to zero for year to year accounts is inane (in a period where deaths door or malady is literally right around the corner).

Why compare returns to term investments when the risk profile & fees are completely different to KS, actually for a few of the past years you would not have been better off even then in KS and there are multiple quick access long term cash investments which are available that have relatively the same risk as TDs, but better returns and access than TDs. You sound like you have had a limited view there also. (Single bank focused I imagine).

If your sister did not invest her funds anywhere else then that is silly and completely unrelated to anything I mentioned, no point to you using it as an anecdote except as a useless aside, wasted except perhaps to demonstrate investment confusion exists between you both. That is no investment versus lowest denominator restricted investment. Whereas I am talking about lowest denominator restricted investment versus broad, diverse, flexible investment with better reporting.

The specific example I gave was in response to your generalised unsubstantiated comments.

Best wishes for your future.

When firms were going to the wall, they used to offer employees shares in lieu of wages. Saved cash-flow and the shares were worthless if it went belly-up.

I regard Kiwisaver in the same light - forced removal of spending-power which will never be around in the long term.

But then I'm obviously in the minority - most people seem quite comfortable betting on endless growth.

I'm struggling to see the comparison since you can put you kiwi saver in multiple asset classes including cash.

So are you saying that "the end is nigh so might as well use them when you have them"?

I don't think they are referring to the asset Class. Rather the intermediaries.

- The provider themselves could go under. Regardless of what assets are held.
- The Govt could simply remove, freeze, limit, or change in any other way your ability to access your money.

History would suggest both are probable rather than possible.

If you buy the house, shares, Term Deposit directly then you are free to manage it as you want. Otherwise you are really just gifting the money to a third party, and hoping they return it when they say they will.

You are mixing a few thing up here, in fact for Term deposits its the opposite of what you are saying.

For a term deposits you are GIVING your money to someone, they take your money and they OWE an amount at the value you agreed at a later date. If they fold you are left as a creditor.

Where as in a Fund it is your money the whole time, they are just managing on your behalf.

Now if the concern is the Government, fair enough. Who know what this lot will do next.

If you are getting the tax member credit, and are contributing the maximum at which your employer will match, then I'm not sure what the incentive would be to voluntarily contribute extra out of your pay to a scheme where you can't access the funds until 65? Any extra savings I would either manage myself, or have in a savings scheme where you can access the savings easily.

Yes but probably 50% or so of NZers don't have a clue how to save. For them a one off walk into their managers office to ask for the top kiwisaver rate will mean they are saving decent money for their retirement without even thinking about it.

There are certain other benefits. For example, your KiwiSaver funds are effectively bankruptcy remote. Early withdrawal is permitted to prevent *you* suffering serious financial hardship -- but the KiwiSaver trustees interpret this as not including payments to creditors in a bankruptcy, given that your debts to them will be wiped anyway as part of the bankruptcy process.

While we're on the topic of kiwisaver. I've got a general question for common taters:
True or false? You can withdraw your kiwisaver to buy a first home if you have more than 20% of the house deposit sitting in your bank.

It doesn’t matter how much you have saved in KiwiSaver or otherwise, as long as a bank will lend to you, you can withdraw the lot for a first home.

We withdrew our full KiwiSaver amount (less $1000 Government Kickstarter) for our house purchase. Once the house purchase was settled, we had a balance of a few thousand $ after the solicitors took their cut.

Not true, there is a limit on what you can withdraw and requirements on the definition of first home, also there is the time in which it is processed. The money is not released until after which makes it far more wise to have the deposit outside. So too the definition is highly dependant & limited for builds, the withdrawal can be restricted. Also for first home starting from scratch it can be limited even if you have not withdrawn before. Not to mention for your first home at all you may be stung through other means. Why not just put most the money in a managed fund anyway at that point, then you can withdraw it when you need it. Even passing the restrictions the withdrawal can be limited by the length of time in Kiwisaver & not all the funds are available for withdrawal, the conditions which the government will allow releasing the money change often... better off outside of Kiwisaver & then you can withdraw the funds without worrying about how it classifies first, deal with being able to build in separate stages, and look at not losing anything by being able to access the money already saved when you need it for a home.

Pacifica, I really worry about both your understanding and advice.

@pacifica - you're getting confused between the Home Start Grant and simply withdrawing your KS savings to buy a first home. If you just want to access the KS money to help buy your first home, you just have to have been in KS for three years and, er, that's it. It's very easy to do. You need to keep $1,000 in the account but the rest of it is all available.

They call this modernizing tax, all they have done is shuffle paper around. If people are already struggling to contribute 3%, how does this help. They should have increased employer contributions, in Australia the min is 9% and it works well. No change to the tax brackets means people on ave income are paying over 30%, where is the incentive to save?. I think it is better to change that based on inflation instead of sucking all the tax they can get their hands on, create huge departments to hand some of it back as benefits which makes the Government look good. The only people smiling from the changes are bureaucrats. What a shame, once again over promise and under deliver.

1. "Allows over-65-year-olds to join KiwiSaver as a provider of low cost managed funds. Employers would not be obliged to contribute for over-65s but may do so voluntarily" - I'm sorry, but it should be 1 law/regulation for all. Over-65's should get employer contributions as well. (I'm not over 65)

2. "A new tax bill will add 6% and 10% KiwiSaver contribution options" - why shouldn't Kiwis be able to choose any % from say 1% upwards - why does the government think it is better at determining the contribution rate than the individual ??? It's the individual's money not the governments.

3. "The new bill will also reduce the maximum period of the contributions holiday from five years to one year. This would limit the time during which members make no contributions to their KiwiSaver." - fine but set the minimum contribution from 1%+

"I'm sorry, but it should be 1 law/regulation for all" - so should we all get paid NZ super regardless of age?

We might end up at that as universal basic income

And if we do, then there will be a good case for revisiting the rules about KiwiSaver.

While NZS is available to all over-65s, however, there is a very good reason why the KiwiSaver conditions aren't the same for them.

Why shouldn't Kiwis be able to choose any % from 1% upwards

The point of having only a limited number of rates at which transfers are automatically made straight from pay packets into employees' KiwiSaver accounts, is to avoid making it too complicated for the employer.

If Kiwis are willing to make arrangements for a direct debit directly between their own bank and their KiwiSaver account, then they can indeed choose any rate they like.

I suppose the continued employer contribution after 65 will be good for those who need to continue working after 65. If you are continuing to work after 65 and get the on-going employers contribution, can you still withdraw funds at 65?

I find it very odd that the review believes adding 6% and 10% steps is likely to have a “positive impact on savings" but increasing the employer contribution by 33% to 4% has “limited evidence this recommendation would raise savings rates.”

Perhaps I'm an anomaly, but an increase in employer or government contributions is the only thing which would encourage me to put more into Kiwisaver. If I want to save 6% or 10%, I will save the excess somewhere more flexible (which I do).

I would also have strongly supported the idea of allowing people to automatically increase their contributions year-on-year or automatically designating part of each pay raise to Kiwisaver payments, as I believe there's good evidence of this nudging people in the right direction overseas.

Same here. Voluntary deposits above what $1040 min or are matched by the employer are much better off going into something flexible such as term deposits.

Dead right! Makes no sense.

Most likely they found out many employers raid the employee's wage anyway so technically it is not an employer contribution at all but an extra employee contribution. Hence those on minimum wage would not find an increase in the "employer" contribution that useful, neither would someone who finds they are then effectively paid less in hand than a coworker with no kiwsaver. Kiwisaver is either treated like a retirement scheme or it is a savings scheme which they could do anyway outside of Kiwisaver. Having neither the protection or clarification means many are contributing double anyway. The "employer contribution" part really is meaningless, it neither comes from the employer but the employee and they are not contributing openly as it is taken without them deciding to commit more of their wages into the scheme.

mfd. What would encourage you to put more into Kiwisaver? Maybe it's the opportunity not to starve in your old age, when you can't meet your rent.
Those who only save calculated on government incentive are not calculating for the poverty bus barrelling towards them. Not thinking at all.

But that's not what the commenters above are saying.

They are saying only that they only put into KiwiSaver the amount that will maximise the Government contribution.

They're not saying that that is the only preparation that they are making for their retirement.

"Allows over-65-year-olds to join KiwiSaver as a provider of low cost managed funds."
I thought recent media rhetoric was that Kiwisaver was not low cost.

Depends which kiwisaver provider you are with. Simplicity is low cost (IMO) at 0.31%, but some are charging over 2% so they are definitely not low cost.

I can't think of any good reason for employees contributing a cent more than their employer is willing to match - why not place this excess in a scheme you can have full control over and withdraw when you please?

It's good for those with no self-control/savings discipline in that it disappears from their paycheck before they can spend it. Other than that, you're right.

They need to make KiwiSaver compulsory. Best to do this before raising the contributions. Then they need to get things up to 5 (personal) / 7 (employer) if possible. Then we will be cooking with gas.

Not really, having dedicated housing is far more useful to people (and the taxpayer bill) in retirement than savings that perform worse than the increase in housing costs. Even rates bills alone are jumping far higher than most kiwisaver scheme performance. You might as well say the rental market will be less than ideal in 10 years time, & 20 years. Even now there is not enough council and state housing to keep up with the past generation of retirees let alone the current one. The waitlists are past the point of being able to accept more people. There is just not the housing for the next batch of retirees and per person it is well above the cost NZ can bare in paying for private retirement housing. It is immense, even up to thousands per week, per person.

The future Kiwisaver will not even provide enough to house people in retirement. At best it is a stop gap for the loss of the pension being able to cover living costs (which is already pretty shaky), at worse it is a scheme with no guarantees it will be available for people when they are 65 at all and different governments can change the rules as they like to cut access to the point basic survival is at threat even to get to retirement.

Now that I think on it a few of may disabled clients would benefit from the opportunity cost of withdrawing their kiwisaver for much need life saving treatments so they can survive to retirement... bit sad they are unable to and are already struggling with no housing & lacking basic living elements to survive till then. No one can plan accidents & medical events these can happen to NZders at any time. Imagine not being able to afford cancer treatment but having kiwisaver which you cannot withdraw, (and there are many being denied access even when in medical need). Forget retirement planning, when you have to have your will & funeral planned before even looking at retirement then there is absolutely no point to kiwisaver. It will not even pay for your burial. Quite literally useless. Better to save outside kiwisaver & have a home then to be homeless, unable to pay for your medical care & even your casket.

No thanks. I don't want to be milked by the financial services sector.

Compulsory and a total of 12% is ok maybe. But 16% would be more realistic. I don't care if the total is made up of employee or employer contributions. A compulsory scheme would not need 'incentives'. Why should the taxpayer be lumbered with that.

There are tax advantages to contributing higher amounts right?

Don't think so, kiwi saver is deducted from post-tax earnings, so no advantage there. And once you have maxed out the govt & employer contributions there are no benefits over any other PIE investment that I can think of. Happy to be proven wrong on that though.

No same tax as always. No tax benefits to kiwisaver at all. Government contributions are a one off payment per year, so only the first $1042 is worthwhile and even then that amount is limited by age of the kiwisaver account and age of the person.

Compulsory is important, so that those who can't don't become dependent on us. I know we interest.co common taters, being financial masters of the universe and all, will be responsible. But you know, there are some who aren't.
But of course it's fine for people to do other investing if they choose. Actually a good thing.

I for one won't be contributing a cent more than any employer matched amount - but then again, I'm one of the lucky ones who get a genuine matched amount that isn't skimmed off the top of my remuneration. The majority of my work colleagues are 20 years my junior and it's really surprising just how financially illiterate they are. The few that do have KiwiSaver, it's only for the housing subsidy, and only on the advice of their parents, so are contributing 8%. You try to explain a different approach, but glazed eyes and shrugged shoulders is all you get....