Overview of the scheme

Kiwisaver is a voluntary work based superannuation savings scheme with Government incentives. Kiwisaver for employees is administered through the PAYE system and self employed people deal directly with scheme providers. Funds are locked in until 65 years of age or for 5 years (whichever is longer) i.e. if you sign up when you are 62 you will have to wait until you are 67 before you can take the funds out.

• All members receive a $1,000 kick-start contribution from the government when they first sign up.
• All members aged between 18 and 65 will have their contributions matched up to $20 per week ($1,043 per year) by the government (“member tax credit”).

Employees

• Employees can elect to join Kiwisaver at any time. Alternatively, if you change jobs you will automatically have Kiwisaver deductions made from you wages or salary initially.
• New employees can elect out of Kiwisaver between weeks 2 and 8 of their employment. If employees opt out they will receive their deductions back from the IRD.
• If you join Kiwisaver (or fail to elect out before the end of your 8th week of a new job) you are locked in as a Kiwisaver member until you retire. However you can take contribution holidays for up to 5 years, once you have contributed for 1 year. There is nothing to stop you having another contribution holiday immediately after the first one finishes, so effectively you can stop contributing at any time after a year of contributing.
• Employees can contribute at either 2%, 4% or 8% of their gross income (this will be deducted from your after tax earnings).
• From 1 April 2009 employees will receive an employer contribution of 2% of their gross income (currently only required to be 1% of their gross income, but some employers contribute up to 4%).
• When you join you will be allocated to a default scheme. This is typically a conservative fund and most investors should consider switching to another scheme or provider that better suits your situation.

Employers

• Employers are required to give all new employees and any others who elect to opt in an IRD Kiwisaver information pack.
• Employers are required to deduct Kiwisaver contributions from wages and salary paid to all new employees. New employees can elect out of Kiwisaver between weeks 2 and 8 of their employment. From 1 April 2009 Employers are required to make an employer contribution of 2%. This is currently 1% until 31 March 2009. This was scheduled to increase by a further 1% each year until reaching 4% but this has now been changed so that 2% is now the highest required amount.
• Employers currently receive an “employer tax credit” as a subsidy towards their employer contribution for each employee of $20 per week or the amount of the employer contribution (which ever is lesser). This will cease to exist from 1 April 2009.
• Employer contributions are currently tax free up to 4% of the employees salary but this is dropping to 2% from 1 April 2009.

Self Employed (including those who receive a shareholder salary) or Unemployed people (including children and people on a career break)

• Need to contact a scheme provider and agreed on a contribution level.
• Make your payments directly to the scheme provider.
• All government incentives will still apply. The main difference is that you don’t receive an employer contribution and the tax benefits that come with that (i.e. all your contributions come from your after tax earnings whereas an employers contribution of 2% is tax free.)

Other points:

• The Kiwisaver funds are not government guaranteed.
• If you die before reaching retirement age the balance of your Kiwisaver account (including all the government incentives) goes to your estate.
• Kiwisaver funds are “Portfolio investment entities” (PIE’s) therefore tax on interest and dividends received is capped at 30% and if a loss is made the government will contribute to your fund at your PIE tax rate.
• Some first home buyers may be able to withdraw their funds and receive an extra government contribution of up to $5,000.