Taking a break from KiwiSaver could cost way more than you think.
By Murray Harris, Milford Head of KiwiSaver & Distribution
KiwiSaver providers across the market are reporting an increase in members suspending their regular KiwiSaver contributions.
This may not be surprising, given the impact of increasing living costs on individuals and households due to high inflation, increasing food and energy costs, and rising mortgage costs for homeowners rolling off low-rate fixed mortgages to much higher interest rates.
Recently the Inland Revenue, which administers KiwiSaver payments, also noted a similar trend and, worryingly, 28 per cent of those stopping their contributions were aged 25-35 years old while 70 per cent were under 45.
This is particularly concerning, because younger KiwiSaver members have the most to gain from regular contributions to their accounts, even if those contributions are small. Over time, these contributions add up, along with investment returns, to a nice lump sum which can be used towards a first home purchase or a retirement nest egg.
The beauty of KiwiSaver is that it’s not just your contributions which are accumulating, but also your employer’s contributions (for most employees) and the annual $521 government contribution, provided you’ve contributed at least $1042.
If you stop your contributions, your employer will also stop their contributions. And, if you don’t contribute anything to your account over the KiwiSaver year (July 1 to June 30), you won’t receive the government contribution. So, you’re essentially giving yourself a pay cut of at least 3 per cent (maybe more if your employer contributes more than the minimum 3 per cent of your pay).
This could add up to tens or maybe even hundreds of thousands of dollars less in your KiwiSaver account at retirement, depending on how long you stop contributing.
For someone earning the median New Zealand income from wages and salaries of $61,800 and contributing the 3 per cent minimum to their KiwiSaver, that’s $1854 in lost personal contributions per year. Add to that lost employer contributions of around $1854 (assuming 3 per cent employer contributions) and the lost government contribution of $521, that’s around $2375 of contributed money you’re missing out on each year.
Including your own contributions of $1854, that adds up to around $4229 less being added to your account each year.
If you add in lost investment earnings and the effects of compounding on those contributions, it’s easy to see how the sums can get very large over time, especially if you stop your contributions for a number of years.
Times are tougher for all of us as we face rising interest rates and higher living costs. It would be easy to try and meet these higher costs by reducing your savings plan. However, if possible, try to maintain your KiwiSaver contributions. By doing so, you will avoid that pay cut and reduce the risk of facing a much less comfortable lifestyle in retirement than you’re dreaming of.
If you would like financial advice about the Milford KiwiSaver Plan, you can speak to one of our KiwiSaver Financial Advisers on 0800 662 348 or at kiwisaveradvice@milfordasset.com
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Disclaimer: Milford is an active manager with views and portfolio positions subject to change. This blog is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to a Financial Adviser. Past performance is not a guarantee of future performance.
Milford Funds Limited is the issuer of the Milford KiwiSaver Plan and Milford Investment Funds. Please read the relevant Milford Product Disclosure Statement at milfordasset.com. Past performance is not a reliable indicator of future performance.