The KiwiSaver Scheme – A Brief Outline
The new KiwiSaver scheme is a voluntary, work-based savings scheme designed to entice New Zealanders to save, particularly for their retirement. The Kiwisaver Bill received royal assent on 6 September 2006, and will come into force on 1 July 2007.
The initiative will be operated by the IRD and administered through the existing PAYE system. Members may elect to have either four or eight percent of their gross earnings deducted and contributed directly from their employer into their chosen KiwiSaver investment scheme in accordance with their preferred investment risk profile.
Existing employees can opt into the scheme, via either their employer or through contacting the Inland Revenue Department. New employees will be automatically enrolled in the scheme, with an allowance of eight weeks to opt out.
IRD will distribute an information pack to employers, who will then be required to pass these on to employees. The scheme will require employers to deduct employees' contributions and forward them to the IRD with their PAYE deductions, pass on details of any new employees and inform the IRD of any employees who wish to opt out of the scheme via an opt-out notice. It is important to note the employer is merely acting as a vehicle by which the employee makes their contributions, the employer will not be liable as an investment adviser or promoter.
Employee contributions will not be subject to superannuation contribution withholding tax, although the exemption will be limited to the lesser of the actual employee contribution or four percent of their gross earnings. The employer’s contribution is therefore effectively tax-free to the employee, but still tax-deductible to the employer.
The funds are then locked-in until such time as the employee turns 65 or five years from the first contribution, whichever is the later. Withdrawals can however be made where the contributor wishes to make a deposit on their first home or they face serious financial hardship, illness, or permanent emigration.
The government has pledged to assist in the enticement of employees into the scheme by making top-ups to contributions under specific circumstances. These circumstances will be: an initial contribution of $1,000 to be locked-in until such time as the member turns 65 or five years from the first contribution, whichever is the earlier; an annual contribution to each member in relation to fees charged by the provider; and offer a first home deposit subsidy of $1,000 per year of membership in the scheme (up to a maximum of $5,000 for five years) for people who have been members for three years or more.
The initiative appears to have various benefits for those who wish to save for the long-term, and for employees who are looking at purchasing their first home in the next four to six years. Although the effect on employers does not appear to be significant, businesses with a large number of staff may find the initial implementation and administration time consuming.
