What is KiwiSaver and how does it work?

Getting set for retirement has never been easier.

Don’t know what type of KiwiSaver fund you’re in? Have no idea how much you’ve got in your account? If this is you, don’t panic – it’s actually a lot more common than you think. Many of us get signed up to KiwiSaver automatically when we start working and forget all about it. Luckily, KiwiSaver is a majorly good thing when it comes to our long-term financial future, setting us up for later in life in more ways than one.

Let’s start with the basics: what is KiwiSaver?

KiwiSaver is a voluntary savings scheme set up by the government to help New Zealanders to save for their retirement. It’s the easiest and most beneficial way to get yourself set up for later in life, and sorting it out now could just be the difference between retiring with a can of baked beans or a bottle of Moët.

The KiwiSaver provider you go with is up to you, and if you don’t know who that is, it’s likely you were assigned to a preferred provider by your employer or a default provider by Inland Revenue when you first signed up. If you want to find out who your current provider is, you can check through your bank statements, payslips, or contact Inland Revenue. If you’re registered for myIR, you can also find out simply by logging in.

How does KiwiSaver work?

KiwiSaver works by you contributing to its balance through your salary or wages (before tax). You can choose to contribute 3%, 4%, 6%, 8% or 10% into your KiwiSaver account and your employer has to match your contributions by at least 3% (provided you’re contributing at least 3% from your pay). You can also make voluntary contributions whenever you like.

On top of all that, there’s also an annual government contribution of up to $521.43. To qualify for the full amount, you simply have to put in a minimum of $1042.86 of your own money between 1 July to 30 June each year – easy enough if you’re already contributing a portion of what you earn every payday, right?

KiwiSaver money is your future money. You’ll only be able to access it once you reach the qualifying age for New Zealand Superannuation, which is currently 65. That means you can’t take that money out whenever you want since it’s money designed to be set aside for your retirement.

When you can withdraw your KiwiSaver

However, there are some exceptions to this rule which allow you to withdraw part or all of your savings earlier than intended. These include suffering from a serious illness, experiencing significant financial hardship, emigrating permanently from New Zealand, or having a life-shortening congenital condition. More commonly, however, early KiwiSaver withdrawals are used by New Zealanders looking to put that money towards purchasing their first home.

The tax rate applied to your KiwiSaver investment earnings, known as your Prescribed Investor Rate (PIR), could be 10.5%, 17.5% or 28%, depending on your income from the past two years (Mercer's online calculator can help you work out your correct PIR). This tax is paid to Inland Revenue generally on your behalf by your provider who will provide you with a statement each year.

How much will I need in my KiwiSaver to retire?

Great question. There’s actually no one-size-fits-all answer to this as everyone’s lifestyle and values are different. But a good rule of thumb is to think about these questions:

  • What sort of lifestyle do you want? Do you want to go on holidays to Europe and indulge in high end items? Or do you want a simpler life, maybe with some chickens and a veggie patch on a bit of land to call your own?
  • What’s most important to you? Seeing and supporting family? Your health? Travel?
  • How long will you live for? Bit of a confronting question, but it’s an important one to consider. We know that women, on average, live longer than men, and if you’re retiring at 65 and you’re fit and healthy, chances are you’ll be living your best life well into your 80s or 90s. That means you’ll need enough savings to last you anywhere from 15 to 30 or more years.

Next, think about your ideal yearly income for everything you need to live the life you want, then times that by the number of years you’d like to use that for from age 65 onwards.

For example, if you want to live in a city like Auckland or Wellington with $50,000 a year until you’re 85, you’ll technically need $1 million by the time you retire. See why we need that KiwiSaver now?

To find out how much you're likely to need in retirement, check out our Retirement Income Simulator tool. Sorted’s KiwiSaver calculator can also help you find out how much you're on track to save for your first home.

Which KiwiSaver fund is right for me?

Most KiwiSaver providers will have a number of fund options ranging from lower risk to higher risk funds. These funds will all hold a diverse mix of investments, with higher risk funds invested in more risky stuff (like shares and commercial property) and lower risk funds invested in less risky stuff (like bonds and cash). The more risk you take on, the more potential you have to grow your returns. But it’s also more likely your balance will have more ups and downs along the way.

Therefore, the right fund for you will ultimately depend on your age and stage in life. For example, if you’re in your early 20s and aren’t planning to access your KiwiSaver for the next 10 or even 20 years, then a higher risk growth fund is probably the best fit for you. This is a fund that’s more likely to be volatile but also potentially provide higher returns over the long run.

Alternatively, if you’re in your 30s or 40s and are looking to use part of your KiwiSaver to fund your first home in the next few months, a more conservative fund with less risk of huge ups and downs would probably be the better option.

It’s really important to make sure you’re in the right fund for where you’re at in life and what your plans are for the future. So if you’re still unsure, talk to your KiwiSaver provider to discuss your options.

If you’re with Mercer, you can get free financial advice by requesting a call back online from our advice team or calling 0508 637 237. You can also find out more about the seven investment options that Mercer offers here.

The above article is general information and does not purport to give financial advice. The Mercer KiwiSaver scheme and Mercer FlexiSaver are issued by Mercer (N.Z.) Limited. Product Disclosure Statements are available free of charge at seatatthetable.co.nz.