What’s Wrong with KiwiSaver?

KiwiSaver has now been around for 11 years.  But there are still a few things that I would like to see changed.  I don’t dislike KiwiSaver; in fact, I think everyone needs to join KiwiSaver as part of their retirement plan. There are a few things that could be made more clear so that everyone can understand it better.

Total remuneration, tax credits, contribution holidays, and default schemes are areas where improvements could be made.

Total remuneration

Total remuneration is where an employee’s compensation package includes everything rolled into one figure. This includes basic pay, your salary, KiwiSaver contributions, and any other benefits.

Some employers, mainly large ones, use total a system of total remuneration where they take the employee and employer’s contribution out of your total remuneration package. So to see how this works, let’s say you are offered two jobs, one with a total remuneration of $65,000, and one with a salary of $65,000.  Which is better? Are they different?

With the total remuneration package, if you are in KiwiSaver at 3% your salary before tax and your KiwiSaver contributions would be $63,050. If you are not in KiwiSaver, your salary would be $65,000.

So the total remuneration package would be 3% lower.

The employer’s argument is that they want to treat everyone the same. They want to treat the employees who are not in KiwiSaver, the same as those who are. So everyone gets the same $65,000 whether you are in KiwiSaver or not.

The problem with this is that it goes against the spirit of KiwiSaver. That is making KiwiSaver attractive by providing benefits to you if you join. So in this situation, you would be best to go with the job with the salary of $65,000, as the employer will add another 3% to your KiwiSaver, making their effective total remuneration package $66,950.

There is also an argument that some employers can’t afford the extra 3% on top of an employee’s salary.  The same argument can crop up by individuals as a reason for not joining KiwiSaver. One solution to this is setting up a scheme where employers or employees who can’t afford the 3% could start at say 1%, and increase automatically over 5 years to the full 3%.

This allows both the employee and employer to acclimatize to contributing to KiwiSaver. And when it increases, they can easily absorb the change. I don’t think anyone could say that they couldn’t afford 1%. Even if you are on minimum wage, it would only be $6 a week or so.

There are no Tax Credits

This has been one of KiwiSaver’s main advertised benefits because you get a tax credit every year. You may think that you get a tax credit from KiwiSaver. In Fact- you don’t! Let me explain.

What is wrong with this so-called “tax credit” is that it has nothing to do with tax. It is not a tax credit. In reality, it is just the government giving you money at a rate of 50 cents for every dollar you deposit into your KiwiSaver account, up to $521.

So, in reality, it should be called a bonus– not a tax credit.

It’s called a tax credit because when KiwiSaver was being developed, it was going to be a tax credit. But that changed as KiwiSaver developed.  It changed because if it were a tax credit, only people paying the tax would access it.

The main problem I have with calling it a tax credit is that some people may think they are not entitled to it because they are not earning money. So not paying tax.

Say you are a stay at home parent, you don’t earn any money, so don’t pay any income tax. You may think that you are not entitled to you “tax credit” because you don’t pay any tax. I’m afraid that’s not right. You are entitled to it even if you don’t work. You should start to pay that extra $20 per week into KiwiSaver to gain the full “tax credit”!

To get the maximum “tax credit,” you need to have deposited at least $1043 for the last financial year.  Everyone should be able to achieve this. It is an easy bonus from the government.

If you are an employee and put in 3% of your pay and earn more than 35,000, you will automatically have deposited enough. If you earn lower than that, you should top it up to get the total bonus. You can ask your provider, look at your payslips and work out how much more you need to put in. It’ll be the best return on an investment you will ever get!

Even if you are not an employee, self-employed, or on a contribution holiday, you should deposit $1042 over the course of the year to get the bonus.

The only excuse you have for not putting money into KiwiSaver is if you are trying to pay off high-interest debt, such as credit card debt with double-digit interest. But if you are deferring paying into KiwiSaver, you have to use them to pay the high-interest debt.

You can’t say that you are not contributing towards KiwiSaver due to the debt and not pay that extra 3% towards the debt.  

Contribution Holidays

If you are in KiwiSaver, you can enrol in a contribution holiday of up to 5 years. It is pretty easy to go through an online form. The problem I have with the contribution holiday is that it sounds too positive. Everyone loves holidays.

Calling it a contributions holiday makes it sound like KiwiSaver is a tax and that you can opt-out from paying it. Rather it should be phrased to emphasise a more negative aspect of not saving for your retirement.

Maybe call it Savings Suspension or something similar.

I understand that KiwiSaver’s contribution holiday aspect can be useful for some people who are in circumstances where they can’t afford to save. I don’t want to remove this option. It needs to exist. I think anecdotally that too many people are signing up for contribution holidays as they see KiwiSaver more as a tax than a benefit.

Update 2019- They did change the name to savings suspension

Default provider

Should everyone is automatically placed into a conservative default fund when they enrol in KiwiSaver? I don’t think so. I have two issues with the default enrollment.

Let’s say that you are entering the workforce and you have enrolled at age 18.  You’re new to everything about KiwiSaver, so everything is done automatically. This means you are enrolled in a default scheme.

The default scheme is a conservative fund (not the most conservative, but the second most conservative fund type). If you are 18, you should be in a growth fund as you have decades before you retire, and so you can ride out any market declines. You have the ability to hold for long periods of time to wait for markets to correct.

Being in the conservative fund can mean that you could lose tens of thousands over the lifetime of your KiwiSaver fund.

There is one point where you may not want to be in a growth fund if you are 18, and that is if you want to use your KiwiSaver for a house deposit in 10 years or so. Then you may want to be in a conservative fund over a growth fund.

On the flip side, let’s say that you are nearing retirement, would the default conservative fund be the best for them? If you are nearing or have retired, you can probably expect to have another 20 to 30 years to invest. And the default fund may not be the best fund to keep growing your money through retirement.

I think that when you get automatically enrolled, you should answer a small survey that could analyse your savings goals. Do you own a house, do you think you will buy a house in the next decade, what are you investing attitude, etc.

Along with your age, this data could better align a provider’s scheme with your savings goals. One of the biggest issues with KiwiSaver is that once enrolled many people just sick with KiwiSaver.

Contributions Lag

I didn’t like how it took 3 months before your contributions showed up in your provider’s fund when I first started KiwiSaver fund. Why is that? You would see your KiwiSaver contributions on your payslip, but it wouldn’t show in your KiwiSaver account for about 3 months.

So the way it works is that your employer deducts your KiwiSaver contributions from your salary. They then send this money to the IRD on the 20th of the following month.

After that, IRD checks to see if your employer’s contribution matches their summary of payroll data for the month the process it. This process can take up to a month as well. And if something doesn’t match up, IRD will follow-up with your employer which can add another month before seeing your contributions in your fund.

Once IRD is satisfied that everything is correct, it sent your money to your fund provider. This can take another few days to clear by your fund provider. The total time between when you see your contributions deducted from your payslip until it ends up in your fund can take up to 3 months.

If you want to track where your KiwiSaver contributions you can log onto KiwiSaver.govt.nz and get a summary all your transaction and where they are.

I wish I were told this when I first enrolled. For the first few months, I panicked that my money had disappeared somewhere and that I didn’t enrol properly. I was envisioning a nightmare of phone calls with IRD to chase up where my money had gone.

What do you think could be improved with KiwiSaver?

Those are the few things that could be improved when it comes to KiwiSaver, in my opinion. They are only small things. I’d be interested as to what you think could be improved with the scheme.

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