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Key KiwiSaver and Tax Cut Changes

John Key and crew have rushed parliamentary process to bring into effect tax cuts and KiwiSaver changes before Christmas. They also rushed some changes to KiwiSaver, before the KiwiSaver member public knew what they were talking about. Here is a summary quote from the NZPA report linked above.

"The tax cuts will deliver $18 a week extra for a worker on the average wage when the first tranche kicks in next April." What is the National Average Wage they refer to? National Party referred to as being $52,000.

So if you've got an extra $18 per week on top of the $10 per week extra you had been delivered in October 2008, you're $28 per week better off. You may like to consider increasing your KiwSaver contributions, or taking up medical insurance, or doing a review of your finances by calling me.

But that is not all. "Incorporating Labour's October 1 tax cuts, the same worker would be $47 a week better off by April 2011, when the whole programme is in force." Quote from NZPA report linked above.

Definitely time for a review of your financial situation!

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KiwiSaver Changes.

This is a really brief summary, and it is based on the scanty information that is currently available.

In summary:

If you're in KiwiSaver and make no payments, or pay by direct debit, there is no change. You need do nothing.

If you're an employee, your matching contributions from the government are limited to 2% of your wages, or $1040 per year, which ever is lessor.

There may be ways around this limit on the $1040 government annual contributions for part time employees who have been in KiwiSaver for more than one year. That remains to be seen. (National obviously can't see it, otherwise they would have stopped this potential loop hole).

If you're an employer, listen up.

Currently the rules generally apply as:

Employee

4% from employee (after his / her tax)

Employer (matching employer tax credits from the government)

1% from your employer this year, unless you've got another arrangement.

2% from your employer next April (stays the same)

Changes include: no more increases to employer contributions from then on.

No more tax credit to the employer to subsidise the employer contributions due to the fact that these are now limited to 2%.

What has also changed is that employees (from the change effective date, April 1, 2009, I believe) can pay only 2% instead of 4% of their wages.

Employers pay a maximum of 2% compulsory contributions for staff.

BUT the biggest difference which was simply not flagged to anyone in any media statements, despite what the Hon Mr Bill English states is:

The superannuation tax to employer contributions to employee superannuation plans extends to KiwiSaver employer contributions over and above 2% of the annual cash salary.

This is a breaking news summary from Neil Smith of Life Risk Limited it is not a comprehensive report on the proposed KiwiSaver or Tax Cut changes from April 1, 2009. I will be blogging, and writing articles on my website on this topic. I am available to speak at work places on this topic, and call me if you have questions or wish to sign up for KiwiSaver, or have me as a resource at your work place in 2008 or 2009.

Why Is KiwiSaver Like Birthday Cake?

Why is KiwiSaver like birthday cake?

A Self Employed person, in the latter part of the working career asked a question about KiwiSaver. They wanted to know if they should continue to pay into KiwiSaver or pay off their recently increased mortgage first?

Neil Smith assures everyone that if you can't eat, there is no point in paying into KiwiSaver, but KiwiSaver is very different to putting money in the bank, and no one wants to miss out on something very special for lack of advice. So this article is written so you can learn about or be reminded of what makes KiwiSaver so special, even when the mortgage is barking at you.

I'll liken KiwiSaver to eating birthday cake. Birthday cake eaten at any other time of the year is simply not birthday cake! Its simply cake. In the same way, putting money into any other form of savings other than KiwiSaver, when you're between the ages of 18 and 65, is different to putting that money into KiwiSaver.

For starters, those that are in the latter part of their working time, there is limited time to take advantage of the offerings of KiwiSaver. There is only until age 65! Just like your birthday cake is only really special as your birthday cake for about one week.

So with KiwiSaver, it is a limited time offer. It stops being really special at age 65. Once you hit that age, your savings contributions don't get the special status that KiwiSaver provides them.

So what is that special status that a self employed person, or any other adult not already earning money from wages or salary has placed on their KiwiSaver contributions each month?

Its not the $1,000 kick start. That is a great incentive, but that is only given once.

Its the not even the low cost structure that KiwiSaver has, which is a huge benefit for anyone saving money for their future.

Its the $1040 "tax credit" or government gift of up to $1040 each for each person over 18, each year.

So my client asked me if I thought he should tame the barking mortgage, as he's increased his mortgage recently. Are they going to get better value for money placed in the KiwiSaver, or the mortgage?

If they reduce the mortgage balanced owed by $1 he saves 9% in interest each year. In 5 years time, he saved 45 cents. As the mortgage is new, it may take more than $1 to reduce the mortgage amount by $1.

If they increase the KiwiSaver contribution by $1, even when the markets are as up and down as they are right now, they have the assurance of another $1 at the end of the KiwiSaver year for each of the first $1040 per year!

So, if in 5 years time, they have saved $2 for the cost of $1, they are better off by at least 55 cents. But they will have earned some interest on that $2 as well, and so their return is going to be better.

Again, if $1 is paid off the mortgage, and 9 percent is the mortgage rate, 9 cents is saved each year for 5 years.

If $1 is contributed to KiwiSaver, at the end if that KiwiSaver year, another $1 is gifted by the Government so that they are earning interest on $2 for at least 4 of those years.

Therefore, in the interests of saving cash flow, the client might consider reducing their direct debit contributions to $87 per month, or less, depending on how much they have contributed from July 1 to today.

If they have contributed $1040 already this year, they should stop paying for 6 months if they want a break from paying.

For more articles on KiwiSaver head over to my main website.
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A disclosure statement is available, upon request and free of charge.

So, you're saving for a home deposit?

I was talking to a couple yesterday who were renting, and saving for a home deposit. They would need about $300,000 for their home loan. I explained that a $300,000 loan would cost them $500 per week to service. This did not excite them. They thought this was too expensive for them and they were wisely going to keep on saving for their home deposit for the next three years as they had a great house and affordable rent. But this statement really caught their attention...

I said "If I asked you today to save $170 per month for your retirement, you'd say, "No Neil we can't afford it". I am going to invite you to save for your house for the next three years, and the Government are going to pay you (as a couple) $170 per month for your retirement. How do you like that?" How many people know that told me they loved it?

Every New Zealand resident that has never owned a home can take advantage of this plan with KiwiSaver. You need to be resident, joined up for KiwiSaver 3 full years, and willing to wait 3 years. Then your own contributions and those of your employer can be drawn out for your first owner occupied home deposit. That is, your first house, that is owner occupied.

Call Neil Smith to find out more and to make sure your KiwiSaver plan is looked after an by Adviser with the answers. I also do work place presentations for businesses in and around Canterbury, New Zealand. A disclosure statement is available, upon request and free of charge.