Mary Holm

Mary Holm is a columnist for the New Zealand Herald.

Mary Holm: Cough up twice for KiwiSaver

24 comments

Is taking employer contributions out of employee pay a mockery? Perhaps, but it's legitimate.

A gift that you give to yourself rather loses its charm. The same goes for KiwiSaver employer contributions. Photo / Thinkstock
A gift that you give to yourself rather loses its charm. The same goes for KiwiSaver employer contributions. Photo / Thinkstock

I was surprised when my child had to sign an employment contract stating that the KiwiSaver employer contribution was to be deducted from the employee's salary. On asking a lawyer friend, she said this was "fairly standard".

Doesn't this make a mockery of the term employer contribution? You might as well not have an employer contribution. After all, the power lies with the employer - the implication being if you want the job, sign the contract.

When I was a teenager, a guy in our crowd used to pinch unopened cosmetics and toiletries out of his older sister's drawer, wrap them up and give them to her for Christmas. She never said anything but she must have known - and been disappointed. A gift that you in effect give to yourself rather loses its charm. The same goes for KiwiSaver employer contributions.

However, the practice is legit, although I wouldn't say it's fairly standard.

Some mainly larger employers take their KiwiSaver contributions out of their employee's pay, but experts say that would amount to only a small proportion of all employees.

An employer is not allowed to just go ahead and do this when an employee joins KiwiSaver. But "through good-faith bargaining, a salary package under an employment agreement can be negotiated whereby compulsory employer contributions can be offset against the employee's gross pay", says Inland Revenue on its website kiwisaver.govt.nz.

A department spokesman confirmed that this would also apply to new job applicants. "The parties to an employment agreement are free to negotiate contractual terms," including this, he said.

I agree that the employer usually has more power in contract negotiations. But in a more buoyant job market - or if an applicant has skills that are in demand - they might ask for higher pay to compensate, or switch to an employer with a different policy.

Is taking employer contributions out of employee pay a mockery? Perhaps. But given that an employer will pay only so much for labour, employers who don't do this will presumably give smaller pay rises over time. So your son or daughter may end up just as well off.

It's still worthwhile for them to be in KiwiSaver to get the tax credits.

Taxed contributions

I am one of the unfortunates whose KiwiSaver employer contributions come out of my pay.

What happens from April 2012 when employer "contributions" will be taxed. My salary is $60,000. Does that mean I am going to be paying more tax on the "employer contribution" (which is am actually paying myself)?

I presume I have to contribute the employer contribution. Is that the law? If I am going to be taxed on my "employer contribution", can I forego the employer contribution and just put my employee contribution into KiwiSaver?

There is a way to stop the employer contributions. But it may not gain you much, other than some flexibility.

First, though, what's happening on April 1? Your employer contribution, which is taken out of your before-tax salary, is at present not taxed. But that tax break ends in April.

At your pay level the tax will be 30 per cent. So 70 per cent of the contribution will go into your KiwiSaver account and 30 per cent will go to Inland Revenue.

Some people think this makes things fairer. Let's say you have a workmate who also earns $60,000 but hasn't joined KiwiSaver. His full $60,000 is taxed, but your employer contribution is not. As a taxpayer, your workmate is subsidising you.

After the change you will both be taxed on all your pay. The only difference is that you will be putting a portion of yours into KiwiSaver - some of it labelled "employer contribution" and some labelled "employee contribution".

Whatever amount you put into KiwiSaver after April 1 - including zero - you will pay tax on all your income.

Still, if you want to stop your employer contributions, you can.

An employer must contribute to KiwiSaver - one way or the other - if their employee is contributing through pay deductions. However, as long as you have been in KiwiSaver for at least a year you can stop contributing by taking a contributions holiday. Compulsory employer contributions would then stop and you would go back to receiving your full salary, just like your fictional workmate.

While on the holiday you could contribute any amount directly to your provider.

You could set up a regular automatic transfer and/or pay lump sums, and alter the contributions whenever you wanted to. But try to put in at least $1043 a year so you receive the maximum tax credit of $521.

Keep in mind that if you like contributing your existing amount - your employer plus employee contributions - you won't gain anything by taking the contributions holiday, apart from flexibility.

And if you do it before April 1 you'll lose the current tax advantage - no tax on your "employer contributions". So at least wait until then before making the change.

To take a contributions holiday, do an internet search on "contributions holiday request" to get the form. If you have been in KiwiSaver for 12 months or more there should be no problems. A couple of notes to other employee KiwiSavers:

* Unless your employer also takes KiwiSaver contributions out of your pay, think hard before taking a contributions holiday, as you then lose employer contributions.

* The tax rate on employer contributions, starting April 1, will in most cases be the same as your income tax rate, at 10.5, 17.5, 30 or 33 per cent. However - for complicated reasons - the cutoff incomes are different.

* For some people, that means their KiwiSaver employer contributions will be taxed at a lower rate than their other income.

Default funds

I note and applaud your publicly reported measured response to the ANZ suggestion that KiwiSaver default funds should be changed to a "life stage" model, where the investment asset mix changes over time to reflect the age of the investor - in contrast to the existing one-size-fits-all conservative asset allocation default fund model.

ANZ seems to assume that all KiwiSavers in default funds have got there inadvertently. Do we know whether this is true, or might people be making a conscious choice for the conservative default fund?

Shouldn't this be researched before further major and potentially expensive changes are implemented?

How much does it really matter where KiwiSaver default funds invest, since every member has the right to change to another type of fund at virtually any time? Provided this flexibility remains, do we really need to bother with further change? Surely the case for change should be investigated further first.

Given the number of changes to KiwiSaver in just five years, nobody could argue against research before more changes are made. I'm confident the Government will do that.

"Life stages" KiwiSaver funds are not new. AMP, ANZ, Aon, Civic, National Bank and SuperLife all offer them. Generally, I think they're a pretty good idea, but I have some reservations:

* Young people are put in higher-risk funds. This is not suitable if they plan to withdraw money within 10 years or so to buy a first home. I reckon everyone entering a life stages default scheme would have to be asked if they own a home, and if not they should go into a lower-risk fund.

* Younger people may freak out when their account balance plunges in a bad year - and possibly stop contributing. Education will be needed.

* People in their 50s and 60s are put in low-risk funds. If they don't plan to spend their KiwiSaver money for a decade or more, they would probably be better off in something riskier.

* For everyone, the risk level may be inappropriate because of the riskiness of their other assets.

On the plus side, people in life stages default funds would see their investments change over time. That should prompt at least some to learn why, leading to better financial literacy.

A note to the anti-KiwiSavers: I know, I know, three Q&As on the topic. Okay, now for something completely different...

Motel service

In reply to the letter last week about poor service in some motels and B&Bs, I think "professionalism" is the key word in any business. Hopefully people who are enthusiastic and hardworking will be keen to develop professional skills quickly.

My sister-in-law, who has operated a small luxury B&B for many years, started off as an "amateur". But she's passionate about her little business. She now has overseas and domestic guests returning year after year and even has to turn away bookings.

Hopefully, the retired couple mentioned in your column would be of the same calibre and would soon develop the professional skills needed. Don't forget that professionals built the Titanic but an amateur built the Ark.

Well put. Still, there is such a thing as overdoing friendliness in these situations. A good host has to judge whether or not guests want long conversations.

Tough business

A couple of years ago I met a motel broker who had, before he became a broker, owned a couple of motels.

He said, "Do you know what the average tenure of a motel is?" I confessed to not knowing. "Eighteen months," he said.

I think we're getting the picture. Motel management is no picnic.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is maryholm.com
Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary Holm cannot answer all questions, correspond directly with readers, or give financial advice.

- NZ Herald

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