Shelley Hanna: Mortgage or KiwiSaver?

Q. I joined KiwiSaver in 2007 and I've been surprised by how much it's grown. I earn just over $58,000 a year. I have worked out that I have contributed about $8200, the Government has contributed $5251 and my employer has contributed around $4030. With investment gains my current balance is now $19,100. At this rate I thought I would have over $150,000 by the time I turn 65 (I'm 45 now). But I see from my latest payslip that tax is now being taken off my employer's contribution, and I know the Government's top up will only be $521 from this year. Should I increase my contributions from 2 per cent to 4 per cent? I am still paying off a mortgage so I don't know if this makes good sense.

A. Yes, from April 1 all employer contributions are now being taxed at your marginal tax rate, with the Employer Superannuation Contribution Tax (or ESCT). Before this the first 2 per cent of an employer's contribution was tax free.

What this means for you is that there will be about $348 less going into your KiwiSaver each year, while the Government will enjoy an increase in revenue.

The lowering of the Member Tax Credits MTC from $1042 to $521 per year has been widely publicised and takes effect at the end of June this year.

Should you increase your payments to 4 per cent?

Currently you are contributing $1160 per year so doubling this would be $2320.

You only need to contribute $1042 to get the full MTC so increasing your contributions will not give you more from the Government.

Usually repaying a debt like a mortgage takes precedence over savings, unless you can show that the savings will give you a better return.

Because the Government tax credit effectively gives you a 50 per cent return on the first $1042 per year that you save, it is easy to demonstrate that that is better than applying those savings to your mortgage, with home lending rates currently around 6 per cent pa.

If you increased your contributions to 4 per cent, would your employer be willing to match you?

If not, it makes sense to use the extra 2 per cent to pay off your mortgage quicker.

Once it's paid off, review your situation and look at increasing your contributions at that time.

Your goal to accumulate $150,000 over the next 20 years is still quite realistic.

Both employer and employee contributions will go up to 3 per cent from April 1, 2013. At that rate, if the Government continues to top up your account by $521 per year, and your fund achieves an average investment return of 4 per cent per annum, you will have around $145,000 at age 65 - before any salary increases.

Will minimum contributions increase further over the next 20 years? Very likely. In Australia it is currently 9 per cent of salary.

Keep reviewing your savings rate every few years, and pat yourself on the back for building up a healthy balance in your KiwiSaver.

Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free by calling 8703838. The information contained in this article is of a general nature and is not intended to provide specific or personalised advice. If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.