QUESTION: I understand the benefits to KiwiSaver are the combination of my input, government and employer contributions. I'm self employed so what happens to the employer contributions? Also I have a very seasonal income, and don't want to commit to regular investments. Maybe there are better options for me?
ANSWER: For most self employed people KiwiSaver is still a generous Scheme even without employer contributions. This is because it is the only superannuation scheme in New Zealand
When KiwiSaver started 4 years ago employers were not required to make contributions. Employers started contributing 1% of an employee’s salary from 1 April 2008 and 2% from April 2009. In this way, people on a regular wage do benefit from regular contributions from their employer. However, every New Zealander over the age of 18 who contributes to a KiwiSaver account is entitled to the same top ups (or tax credits) from the government.
Firstly, every new KiwiSaver will receive a $1000 ‘kickstart’ on signing up. Then, those over 18 receive annual ‘tax credits’ - depending on how much they have contributed over each 12 month period. Employer contributions do not count so the self employed are not disadvantaged.
One of the advantages of being self employed is that you are not restricted to contributing 2% 4% or 8% of your gross salary – you can contribute any amount you choose, either by regular direct debit or an annual contribution. Since your cashflow is irregular a lump sum may work best for you. Others find a monthly direct debit is easier on the cashflow.
There are many self employed people who contribute $1042 each year (or $87 per month) in order to get the maximum tax credit from the government. From 1 July this year the government has lowered their maximum ‘tax credit’ contribution to $521 per annum. While you still need to contribute $1042 each year and be a member for the full 12 months to receive this full amount, this is still a worthwhile incentive. For every month that you delay joining you will get about $43 less from the government.
For a new KiwiSaver investor starting on 1 July this year and contributing $1042 during the year, they will receive an equivalent return (before any investment return) of 50% with the government tax credit, plus the $1000 ‘kickstart’.
Even without the employer contribution, it would be difficult to find a savings product providing a better outcome than this in the current climate.
As published in the Hawkes Bay Today 6 September 2011
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