Budget 2005: Government promises $1000 for savings scheme

Workers will get $1000 each if they join a new workplace savings scheme, under savings measures unveiled in today's budget.

They could then qualify for up to $5000 towards their first home purchase, Finance Minister Michael Cullen said.

The KiwiSaver scheme would lift New Zealand's low level of household savings and help first-home buyers into a home, Dr Cullen said.

Workers who join the voluntary scheme, expected to start in April 2007, will automatically receive $1000 from the government towards their savings.

Participants must contribute at least 4 per cent of their gross salary.

Once in the scheme for three years, first-home buyers will then qualify for a government contribution towards their deposit of $1000 for each year in the scheme -- up to $5000.

But Dr Cullen said the home deposit assistance would be income tested.

The level was yet to be finalised, but was likely to be around $100,000 a year for a couple. There would also be an as yet undecided cap on the price of a house that could be bought.

Once a house was purchased, payments into the savings scheme could be diverted to mortgage payments.

The KiwiSaver package is worth $588 million in its first four years.

The Government expected 25 per cent of workers to be enrolled in the scheme by 2012 and about 3000 first-home buyers to be assisted into a home each year.

Dr Cullen said the package was necessary to lift New Zealand's household saving rates, which were among the lowest in the developed world.

Low savings and high private debt meant New Zealanders currently faced a risk premium on interest rates, making borrowing significantly more expensive than in other similar countries.

"Increasing our pool of domestic savings should lessen our exposure to these risks," Dr Cullen said in a statement.

"Savings also benefit the individual, conferring a greater sense of financial security in both work and retirement."

The Government also hoped the deposit assistance would help reverse New Zealand's declining home ownership rate.

KiwiSaver would be administered privately, with workers able to choose a fund provider. The Government would contribute to administration costs.

Other features of Kiwisaver include:

* everyone is automatically enrolled when they start a new job, but will have one week to opt out;

* money will be initially held by Inland Revenue while people choose a private fund provider;

* once in the scheme people are locked in until retirement, except in cases of financial hardship, permanent emigration, or first-home ownership;

* all individuals can stop contributions for up to five years at a time;

* workers under 18 can join, but are not automatically enrolled;

* enrolment will not be automatic in workplaces where a savings scheme already exists;

* workers in an already existing workplace scheme will still be eligible for home deposit assistance.

Also included in the package is funding for education programmes to boost New Zealanders' financial literacy, and an extension of the already operating government Mortgage Insurance Scheme.

Under the scheme low-income earners who can afford to meet mortgage payments, but have little or no deposit can borrow up to the full value of a house.

Housing Minister Steve Maharey said the scheme was currently operated through Kiwibank, but would now be opened up to other lenders.

The Government hoped to boost uptake from less than 1000 people a year to more than 5000.

Changes would take effect in July this year and by 2008-2009 would cost $22 million a year.

Under the scheme Housing New Zealand Corporation pays two-thirds of the insurance cost, which is a one off payment equal to 3 per cent of the loan value.

- NZPA