Member Tax Credit reductions

Thanks for your question.

Under proposed changes to KiwiSaver announced as part of  Budget 2011, Member Tax Credits will be cut by 50% (assuming National is re-elected).

Government pays out the MTCs on an annual basis and the targetted date for the first reduced payment is June 30, 2012. So technically, it would appear that the reduced amounts start taking effect this July with the former maxium amounts of $1,043 being paid to KiwiSaver accounts end of June.

The other dates of note with respect to major KiwiSaver changes are April 1, 2012 and April 1, 2013.

The former is when Government will start taxing your employer contributions. Previously, they have been tax free, a nice perk for your KiwiSaver account. Those contributions will next year be taxed at the marginal tax rate.

Government's rationale for cutting this sweetener was that half the benefit was going to the top 15% of income earners, who got a larger tax break due to their higher marginal income tax rate.

The following April, in 2013, is when your contributions will automatically go up to 3% from 2%. The same goes for employer contributions. The idea is that by raising contributions from your own earnings, you'll be able to compensate for the decreasing benefit from Government, effectively saving more.

You can read more on the policy changes on the official KiwiSaver website here:

National also produced some tables that show the long-term effect of KiwiSaver changes based on income and contributions which are worth a look and can be seen here.

Here's one example:

If you were earning $60K a year now and made 2% contributions of $23.01 a week, you would receive in matching contributions $23.01 from your employer and an extra $20 a week from Government in Member Tax Credits. Skip ahead to April, 2013 and your 3% contributions works out to $34.52 a week and your employers is down $24.16 (because it is now taxed) and your Member Tax Credit falls to $10 a week.

You can also tailor the numbers to your own situation by using the updated KiwiSaver calculator on sorted.org.nz's website. It will show you the varying projections based on contributions of 2%, 4%, or 8%. I'd read the assumptions upon which their projections are based in the fine-print below the calculator.

It assumes annual wage growth of 3.5%, which is questionable, in my humble opinion.

Mercer has today announced the results of its latest pay trends survey, which shows that despite a rising cost of living, New Zealand salary increases have stalled at 2.5% over the past six months and are not expected to rise over the next year.

Although National is forecasting wage growth of 4.5%, international consultancy firm Mercer reported last month that salary increases in New Zealand have stalled at 2.5% over the past six months. It also said salaries were not expected to rise over the next year. With inflation is running at 4.5% (due to the GST) that makes some of those calculations suspect.

I'm also including a link to National's KiwiSaver scenarios (reflecting the Budget 2011) changes. Also worth a peek.  You can see them  here.

I hope this is helpful.

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Amanda