Government may scrap KiwiSaver 'holiday'

Taking a "holiday" from KiwiSaver payments can be more financially damaging than people realise say retirement experts. Photograph by Kenny Rodger

The Government is considering changing regulations around KiwiSaver holidays after calls from retirement chiefs to tighten the rules.

The Commission for Financial Capability wants five-year payment breaks scrapped with payment breaks rolled over one year at a time.

It also wants the word "holiday" replaced with "suspension" because it fears the word holiday sounds too upbeat and may be encouraging savers to think of it as a positive.

James Hartley of the Ministry of Business, Innovation and Employment said it was considering the requests for change to the voluntary, work-based savings scheme.

"The Government is considering the Commission's recommendations, including those relating to the KiwiSaver contributions holiday, and will respond to those recommendations in due-course," Hartley said.

The Commission's general manager investor education, David Boyle, said the changes were essential to take KiwiSaver from "infancy to adolescence" in good shape.

He was admandent the work "holiday" needed to go.

"That word gives the wrong impression that it's something good," he said.

"New Zealanders need to be made aware how financially damaging taking a five year break can be - it shouldn't be seen as a holiday."

Boyle pointed out suspending payments meant losing not only the employee and employer's contribution but also the $521 annual tax credit.

He said if the "suspensions" were reduced to one year people could reassess their financial situation and if necessary take another year.

"A lot of people are on a "holiday" when they have recovered financially."

"Some actually forget they have stopped paying into their KiwiSaver."

Boyle said taking a holiday on an income of $35,000 meant a loss of more than $2600 a year including the tax credit.

"Losing that amount has a huge impact on someone when they have stopped working."

More than 765,000 people were taking a break from payments in the last financial year, to June 2016.

And that number was increasing each year, according to Financial Markets Authority data.

Savers can take a break of up to five years. But a five-year break at age 25 would cost around $40,000 by the time savers reach 65.

ANZ, New Zealand's largest KiwiSaver provider, says that more than 80 per cent of its members who ask for a contributions holiday take it for the maximum five years. Many then roll over onto another holiday when the first finishes.