The government is halving the member tax credit available to people who contribute at least $1042 in a year to $260.72. Photo: RNZ
An increase in default KiwiSaver contribution rates announced in Thursday's Budget could leave KiwiSaver members more than $100,000 better off at retirement - but there is a warning that not everyone will benefit.
As part of the Budget, a number of changes were announced to KiwiSaver.
The government will halve the member tax credit available to people who contribute at least $1042 in a year to $260.72. When the scheme was first launched, the government provided a matching $1042. The cut is expected to save the government $400 million a year.
Employer and government contributions will be made available to 16- and 17-year-olds. Previously, they had only applied to those aged 18 to 65.
The default contribution rate for both employees and employers will increase in two stages to 4 percent from 1 April, 2028. Employees can opt to stay on the lower 3 percent rate, matched by their employer, but that will reset to the new default rate after 12 months.
Impact of higher contributions
KiwiSaver managers estimated that the increase to a default contribution rate of 4 percent, plus 4 percent for an employer, would make a material difference to KiwiSaver members' final outcomes.
Murray Harris, head of KiwiSaver at Milford, calculated that someone who was 35, earning the average wage with a KiwiSaver balance of $25,000 in a balanced fund, could have an extra $56,000 (inflation adjusted) at 65. That would give them $50 a week more to spend, he said.
At Sharesies, general manager of funds Matt Macpherson said without adjusting for inflation, the increase for a 30-year-old currently earning $75,000 a year with $30,000 saved in a growth fund would be $175,000 at 65.
Harris said the increase would help to close the gap between what it cost to live in retirement and what NZ Super would provide. But he said it would have been good to see contributions extended to people over 65, as well as teenagers.
Some KiwiSaver providers said the increase was not likely to be enough.
Kōura founder Rupert Carlyon said 4 percent plus 4 percent was better than 3 percent plus 3 percent.
"But it's well short of six plus six, which would have brought us in line with Australia, and it's nowhere near the 15 percent OECD average pension contribution. We have a long way to go, but it's better than nowhere."
Dean Anderson, founder of Kernel Wealth, said the government should have followed Australia's lead and set a path detailing how contributions would increase over time.
"I don't know why we couldn't have gone further, with a long-term plan."
Carlyon said he was worried by stats showing that half of employers used a "total remuneration" approach to KiwiSaver. This means that rather than providing a contribution on top of a person's salary, they are offered a total salary amount and the employee decides whether to contribute to KiwiSaver from that total.
Carlyon said he was worried this would become more common as a way for employers to avoid the additional contribution.
"This is probably net positive for balances over time, but not for everyone - only a select group of people who have employers who do the right thing."
Reduction in member tax credit
Macpherson said the impact of the smaller tax credit could compound out to $21,000 less for the 30-year-old earning $75,000 that he used as an example for the higher contribution calculation.
Retirement Commissioner Jane Wrightson. Photo: supplied
He said some people were being left behind, "in particular self-employed". He said he saw many self-employed people contributing to Sharesies' scheme at the level to get the member tax credit - they would now have their returns reduced.
Retirement Commissioner Jane Wrightson said low-income earners, Māori, women and self-employed people would be hit hardest by the reduction.
"It's a shame there are so few government incentives for a scheme that underpins private saving for retirement. I would at least have liked to see some of the savings from reducing government contributions be applied to serving those groups where we see the widest retirement savings gaps."
But other providers said the impact of the credit was not material for most KiwiSaver members. Anyone who was earning at least $50,000 a year and contributing 3 percent would have received the full payment.
"As much as I hate to see tweaking to KiwiSaver and removing incentives erodes confidence, when you're looking to find balance in the economy and make a saving, on a cost benefit basis, it's probably okay."
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