Thinking of pausing KiwiSaver? The long-term hit you might be missing. Photo / 123rf
After several years of cost-of-living strain, Kiwi households are now facing a new pressure point.
The war in Iran has sent oil prices sharply higher, pushing up petrol prices and threatening to lift the cost of everything from transport to groceries.
In this environment, it is understandable that some New Zealanders might begin looking for immediate ways to ease the pressure – and KiwiSaver contributions can sometimes feel like one of the few expenses that can be paused.
KiwiSaver allows members experiencing financial pressure to apply for a savings suspension – often still referred to as a contribution holiday – for between three months and one year at a time (and longer in some circumstances). It can provide valuable breathing room.
But while the short-term relief is real, the long-term cost can be significant.
According to Inland Revenue data, over 80,000 KiwiSaver members are currently on a savings suspension. In recent years, that number has typically hovered around similar levels – a meaningful portion of the more than 3.3 million enrolled in the scheme. During periods of economic stress, that figure tends to rise.
The cost-of-living pressures facing many households are genuine. Higher interest rates over the past two years have squeezed mortgage-holders. Rents remain elevated. Food prices, insurance and utilities have all climbed. For some families, suspending KiwiSaver contributions is not a choice but a necessity.
However, it is important that such a decision is made carefully – and with eyes wide open to the long-term trade-offs.
KiwiSaver works best when contributions are consistent and uninterrupted. It is not just your own savings at stake, but also employer contributions and, in many cases, the annual Government contribution.
If you are employed and contributing at least 3.5% (from April 1) of your salary, your employer is generally required to match that with another 3.5%. That is effectively an immediate 100% return on your contribution before investment returns are even considered.
On top of that, members who contribute at least $1042.86 per year receive the full Government contribution of up to $260.72. By going on a savings suspension and stopping contributions entirely, you may forgo both.
Over time, those missed contributions compound.
Consider a simple example. A 35-year-old earning $70,000 contributes 3.5% of their salary – $2450 per year – with their employer contributing the same amount. If they suspend contributions for just two years, that is $9800 in combined employee and employer contributions missed, excluding Government contributions.
Assuming a very modest average annual return of 5% above inflation over the long term, that two-year gap could reduce their retirement balance by tens of thousands of dollars by age 65. The earlier in your working life the break occurs, the larger the ultimate impact, because you are interrupting the most powerful phase of compounding.
A contribution holiday may feel small in the present. In the context of a 30-year investment horizon, it is anything but.
There is also a behavioural risk that is often overlooked.
It may be easy to opt out. It is not always easy to opt back in.
When financial pressure eases, there can be a temptation to redirect freed-up cashflow into lifestyle spending rather than reinstating KiwiSaver contributions. What begins as a temporary measure can quietly become semi-permanent.
Behavioural economics tells us that inertia is powerful. KiwiSaver’s success since its launch in 2007 has been built in large part on automatic enrolment and default contribution rates. Once people are in, they tend to stay in. When that automatic mechanism is interrupted, restarting requires conscious effort.
This is where external accountability can be helpful. Generate was founded on the belief that everyday New Zealanders deserve access to KiwiSaver advice. A regular review with an adviser can act as a circuit-breaker, prompting members to restart contributions once circumstances improve.
Because contribution holidays should ideally be viewed as exactly that – temporary. If you must pause, consider setting a calendar reminder to review the decision in three or six months, rather than letting it drift.
Before suspending KiwiSaver, it is worth considering alternatives.
Could contributions be reduced rather than stopped altogether? Even contributing enough to secure the full Government contribution can materially improve long-term outcomes. Maintaining the minimum contribution also ensures you continue receiving employer matching.
Other options might include reviewing discretionary spending, refinancing debt where possible, or speaking with a financial adviser about budgeting support.
Of course, there will be situations – redundancy, illness, sharp income loss – where suspending KiwiSaver is entirely appropriate. Retirement savings are important, but immediate financial stability must come first. There is little point investing for the future if you cannot meet today’s essential expenses.
The key point is that a contribution holiday should be a considered decision made out of necessity, not convenience.
KiwiSaver balances remain modest for many New Zealanders. The average balance sits well below what is estimated to be required for a “comfortable” retirement alongside New Zealand Superannuation. That reality makes continuity even more important.
A few months off contributions during a tough patch will not derail a retirement plan. But repeated or extended breaks over a working lifetime can materially weaken the outcome.
KiwiSaver was designed as a long-term partnership between employees, employers and the Government. When contributions flow consistently from all three, the system is powerful. When one part of that equation stops, the compounding engine slows.
Cost-of-living pressures are real and for some households, difficult decisions are unavoidable. But before ticking the box on a savings suspension, it is worth pausing to calculate not just the short-term gain, but the long-term cost.
Sometimes, the most expensive financial decisions are the ones that feel the smallest at the time.
Generate is a New Zealand-owned KiwiSaver and Managed Fund provider managing over $8 billion on behalf of more than 180,000 New Zealanders.
This article is intended for general information only and should not be considered financial advice. The views expressed are those of the author. All investments carry risk, and past performance is not indicative of future results.
To see Generate’s Financial Advice Provider Disclosure Statement or Product Disclosure Statement, go to www.generatewealth.co.nz/advertising-disclosures/. The issuer is Generate Investment Management Limited.