Covered in this guide...
What is KiwiSaver?
KiwiSaver is a voluntary, work-based savings initiative set up by the New Zealand Government. Its aim is to be a practical and easy way for New Zealander’s to save for their retirement or their first home.
How does KiwiSaver work?
When you are employed you select how much of your earnings you would like to contribute to the KiwiSaver scheme. The common options are 3%, 4%, 6%, 8% or 10%.
Your employer must also contribute a minimum of 3% to your KiwiSaver account.
The New Zealand Government will also make a contribution to your KiwiSaver. This amount is dependent on what you contribute. This payment is a maximum of $521.00 per year.
These contributions are taken and invested in assets which provide different levels of growth and return.
How is KiwiSaver taxed?
It is tax free to make withdrawals from your KiwiSaver account. However, you do pay tax on the money your KiwiSaver investment earns.
There are two different types of schemes that effect how you are taxed. Every fund will participate in one of the following schemes:
Portfolio investment entities (PIE’s)
Portfolio investment entities which include all the default KiwiSaver Schemes are taxed using the PIR (Prescribed Investor Rate).
Prescribed investor rate is a tax rate which is based on your total taxable income over the past two years. This means the rate your KiwiSaver earnings are taxed at are personalised to you and your current earning situation.
Widely-held superannuation schemes
All widely-held superannuation schemes are taxed at a fixed rate of 28% p.a.
Where is my KiwiSaver money invested?
KiwiSaver funds take the money you contribute and invest it in a variety of income and growth assets. Depending on the fund and the risk you are willing to take, your money will be invested in a combination of both income and growth assets.
It comes down to two broad categories; income assets and growth assets:
Income Assets
Income Assets are investments in cash assets and bonds.
Pros
- Low risk level making income assets safe investments
- Usually fixed interest investments (like bonds) which means the value of the investment doesn’t tend to change
Cons
- Less potential for growth
- Typically earn lower capital gains
Growth Assets
Growth Assets are investments in shares and property.
Pros
- More potential for growth
- When invested for long periods of time, growth assets are expected to deliver high returns
Cons
- Growth assets tend to fluctuate in value meaning you have to be willing to deal with the ups and downs of the investment in the short-term
- High risk level
Risk and return
KiwiSaver offers a variety of funds that all come with their own risk level. The fund you choose determines how risky your investment is. Your risk level is determined by the percentage your fund invests in growth assets. Growth asset investments are riskier than income asset investments.
Each provider will offer a risk indicator for their fund/s. This is a scale that displays the risk involved in a particular fund. The scale starts at 1- being the lowest level of risk, and builds to 7- the highest level of risk.
What types of funds are there?
| Fund Type | Aim of Fund | Risk Level | Percentage in Growth Assets | Percentage in Income Assets |
|---|---|---|---|---|
| DEFENSIVE FUND | Aims to achieve stable returns over the short term. | Low Risk | 0-9.9% | 90-100% |
| CONSERVATIVE FUND | Aims to provide stable returns over the short to medium term. | Low to medium risk | 10-34.9% | 63-89.9% |
| BALANCED FUND | Aims to achieve a medium level of return over the medium to long term. | Medium Risk | 35-62.9% | 35-62.9% |
| GROWTH FUND | Aims to achieve higher returns over the long term. | Medium to high risk | 63-89.9% | 10-34.9% |
| AGGRESSIVE FUND | Aims to achieve higher returns over the long term. | High risk | 90-100% | 0-9.9% |
KiwiSaver Summary
Do your research
There are many different KiwiSaver providers throughout New Zealand. They all offer different funds to suit a variety of people. Funds also have differing return based on the success of their investments. It is advised to look at your options to see what funds are producing high capital gains.
Determine the timeframe you are wanting to invest your money for
Certain funds will have a higher success rate over different time frames. Determine how long you are wanting to invest your money for in order to receive maximum capital gains.
Determine how much risk you are willing to take
Your risk indicator is based on the percentage of growth assets you fund invests in. The more growth assets you invest in, the higher potential there is for capital growth. However, this also comes with more risk than investing in income assets. You need to decide how much risk you are willing to take when choosing a KiwiSaver fund..
