Helen Twose 's Opinion

Personal finance and KiwiSaver columnist at the NZ Herald

KiwiSaver: Contributions to KiwiSaver 'after-tax'

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Unlike cash on term deposit, KiwiSaver funds will be spread across a range of investments. Photo / Thinkstock
Unlike cash on term deposit, KiwiSaver funds will be spread across a range of investments. Photo / Thinkstock

If I were to deposit cash into KiwiSaver would I be taxed? I am self-employed and receive bits of cash on the odd occasion. Rather than deposit it in the bank and be taxed if I deposit into KiwiSaver would I be taxed?

The short answer is yes, KiwiSaver is taxed. But taxation isn't the only difference between saving through KiwiSaver and the cash-deposit options.

KPMG tax director Rebecca Armour has some further detail:

"From your question, it sounds like you are wondering whether a deduction against your income is available from your earnings for contributions made to KiwiSaver.

"Whether you are self-employed or an employee, your contributions to KiwiSaver are 'after-tax' and so from that perspective there is no difference between putting your savings into KiwiSaver or into a bank.

"Any interest earned on your bank deposits will likewise be subject to tax. However, if you pay tax at the top marginal rate of 33 per cent there may be a benefit in having your money in a KiwiSaver account as your earnings in that fund will be taxed at a top rate of 28 per cent," she says.

Some KiwiSaver schemes are portfolio investment entities (PIEs) - in fact, all the default schemes are portfolio investment entities - with different tax rates depending on your annual income.

The tax rate for your investment earnings from a PIE is referred to as your prescribed investor rate (PIR).

The prescribed investor tax rate is between 10.5 per cent and 28 per cent depending on your earnings and your provider will ask you for your PIR every year.

Withdrawals from your KiwiSaver account are tax-free.

"There are other non-tax implications of investing your savings in KiwiSaver as opposed to a savings account in a bank which should be considered," says Armour.

"Each KiwiSaver provider will have different rules, fees and terms and conditions for how they invest your money.

"The other important difference is that unlike a bank account, your KiwiSaver savings won't be able to be withdrawn until you reach retirement age unless there are special circumstances.

"This would include buying your first home, moving overseas permanently or suffering financial hardship or serious health issues."

Saving into KiwiSaver is all well and good, particularly with the additional benefits you won't get with a regular term deposit or savings account, but it's also important to remember that KiwiSaver is a retirement savings scheme with only limited access to funds until you are at least 65.

Depending on your savings goals it may or may not suit you to have your money locked up.

Joining KiwiSaver will give you a $1000 kick-start, plus the potential to earn an additional $521.43 a year in member tax credits if you chip in $1042.86 annually.

Unlike cash on term deposit, KiwiSaver funds will be spread across a range of investments, including shares, property, cash and fixed interest investments.

This investment mix will affect the rate of return in a different way to the "steady as she goes" low risk, low interest returns of bank deposits.

Each provider has a range of different KiwiSaver funds to match your propensity for risk and savings goals. The KiwiSaver Fund Finder calculator provided by Sorted is a good starting point.

Disclaimer: Information provided is stated accurately to the best of the respondent's knowledge at the time of publication. It is general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice specific to their situation before making an investment decision.

To have your KiwiSaver questions answered by the Herald's panel of industry players email Helen Twose, helentwose@gmail.com.

- NZ Herald

Helen Twose

Personal finance and KiwiSaver columnist at the NZ Herald

Helen Twose is a freelance business journalist who writes regularly about KiwiSaver and entrepreneurial companies. She has written for the Business Herald since 2006, covering the telecommunications sector, but has more recently focused on personal finance and profiling successful businesses.

Read more by Helen Twose

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