The Government has announced through the Budget changes to be made to KiwiSaver. The changes will save the Government $2.6 billion over four years. This reduction in the main is achieved by the Government's halving its annual contribution now set at dollar for dollar to a maximum of $20 a week. There should be no panic and no kneejerk reaction to this, either from existing contributors or from potential savers.
The changes do not take effect until next year, firstly, with the employers' contribution being taxed in April 2012. Then, after the financial year for KiwiSaver ends on June 30, 2012, the dollar for dollar to $20 per week maximum will be halved. This means, therefore, that there will be two more payments of $1040 in July this year and July 2012.
The employer subsidy is to be taxed initially from April 1, 2012. At present, tax only applies to employer contributions over 2%, so the change will reap more revenue for the Government. On April 1, 2013, workers and employers will be required to lift their minimum contributions from 2% to 3% such that the continued savings will be a net 2%. There is a 12-month period from April 2012 to April 2013 when the present contributions will be reduced by the contributor's tax margin before it returns to a net 2%.
The Government expects that once all changes are in place from 2013, KiwiSaver funds will continue to accumulate rapidly.
"Total funds are projected to rise from $7.9 billion to about $25 billion by 2015, and almost $60 billion in 10 years," Finance Minister Bill English said. Of the $7.9 billion already in KiwiSaver, about $3.5 billion has come from the Government.
The changes do not affect the $1000 kick-start such that the Government will still contribute $2.5 billion to KiwiSaver accounts in the next four years with the tax incentive and the kick-start of $1000. This assumes the average past joining rate of 20,000 new members a month will continue.
These changes were initially mooted by the Savings Working Group, which also recommended an auto-enrolment scheme. The Government is looking at this but has not indicated any likely implementation time.
In my opinion, the change to a 3% contribution will hardly be noticeable. In reality, the amount is very small and is also not enough to give a satisfactory lump sum in retirement. The Government's own examples of savings after the changes bear this out.
A couple, both working, aged 35 and with a combined gross income of $77,000 are expected at age 65 to have $247,500. It is a very good sum but in today's dollars, the present NZ Superannuation which, in my opinion, is about $120-140 a week short for a married couple, is the equivalent generated from a lump sum of about $460,000.
The Government's example suggests NZ Superannuation will also be available. It is to be hoped it will be in 2041, but will the two be enough?
Australia has already found that contributions since 1994 of initially 3% and rising to 9% by 2002 are not adequate, such that they are being increased to 12% of gross wage. It is obvious we must save more.
Those who are already in KiwiSaver should be feeling smug. After all, they have had the benefit of the $3.5 billion of Government money. The doomsayers are worried about the Government tinkering with the system. It has to be affordable, and the fact you are still getting some incentive has got to be a positive.
Those who joined in 2007 and contributed at least $20 a week have a minimum of $8000 in their accounts, regardless of what fund performance has been. This four-year advantage over those joining now is equivalent to about $19,000 of straight compounding through a 20-year period from now, without any further contributions.
KiwiSaver is a good scheme. The fact you cannot withdraw unless you meet special conditions means it is here to stay, regardless of the fine tuning. It should be compulsory to provide a base for New Zealand's infrastructure: $25 billion in 2015 rising to $60 billion in 10 years is a lot of road, rail and Canterbury rebuilds.
• Peter Smith is an Authorised and Certified Financial Planner and is the principal of Kepler Group Otago Limited. Email: pete@keplergroup.co.nz
