The Investor: Kiwisaver about to move into High Gear

Employees will notice a drop in their take-home pay. But for someone on $30,000 it will be less than $6 a week, and for someone on $50,000 less than $10 a week, so most people will adjust pretty quickly.

And they will welcome the rise in KiwiSaver money coming from the boss – after seeing employer contributions cut last April when they started to be taxed. For every employee, and especially those on lower incomes, their employer contributions will rise to a higher level than they were a year ago, before the tax started.

For example, the employer of someone earning $30,000 contributed $600 a year before April 2012. Once taxation started, that fell to $537. From April 1 it will rise to $743 a year.

For someone on $50,000, employer contributions dropped from $1000 to $825 last April, and will rise to $1238 this April. And for someone on $100,000, employer contributions dropped from $2000 to $1340 last April, and will rise to $2010 this April.

Over the long term, the boosts in employee and employer contributions will make a big difference to people’s total retirement savings.

Given all the changes, it’s probably a good time to review just why KiwiSaver is highly likely to beat any other investment. From 1 April 2013 onwards:

• An employee earning $20,000 contributes $600 a year. The employer contributes $495 and the tax credit is $300. Total inputs are 2.3 times what the employee put in.

• An employee on $60,000 contributes $1800, the employer $1,260, and the tax credit $521. Total inputs are just under double the employee contribution.

• An employee on $100,000 contributes $3,000, the employer $2,010, and the tax credit $521. Total inputs are 1.8 times the employee contribution.

• A self-employed person or other non-employee contributes $1,043 ($20 a week or $87 a month) to get the maximum tax credit of $521. Total inputs are 1.5 times the person’s contribution.

If twice as much money goes into an investment, then the returns are twice as big, and the final total is twice the size.

For someone who joins KiwiSaver in their 50s, this might mean retiring with $100,000 compared with $50,000 if they had saved elsewhere. For someone in their 20s, it might mean retiring with $1 million compared with half a million. Wow!

One downside to the rise in employee and employer contributions is that people who haven’t joined KiwiSaver because they feel they can’t afford it will find it a bit harder to afford.

It’s easy for others to say that 3 per cent of pay is not much. If you’re struggling to buy shoes for the kids, every dollar counts. But people who hesitantly join KiwiSaver often report that after a few weeks they get used to taking home a little less.

The very people who don’t join KiwiSaver because of affordability are the ones who would most benefit from it. I urge you to try – knowing that employees commit to contributing for only a year, and you can pull out sooner if you get into financial strife.

GOOD BYE

This is my final column – after 16 years. A big thank you to all of you loyal readers, and particularly to those who have given me feedback over the years. Go well, everyone.