KiwiSaver will be here on 01 July 2007.
KiwiSaver is a voluntary scheme designed to allow employees to save either 4% or 8% of their gross income.
The funds are ‘locked away’, with some exceptions, until the employee reaches the eligibility age for national superannuation – currently 65.
The employee can choose a scheme in which to have their funds invested or they can elect to use the employers chosen scheme or they can have one selected for them from one of the six default providers.
Employers need to be careful in their duty to employees when providing information about KiwiSaver scheme providers. Many of you will have heard Gareth Morgan’s less than flattering comments about the industry’s past behaviour.
The funds in all KiwiSaver schemes are not Government guaranteed. However, some have a ‘capital guarantee’ offered by the scheme provider.
What does it mean for employers?
You have an obligation to inform you employees about KiwiSaver. You will be issued information packs in June, by the IRD, to pass on to your employees.
KiwiSaver will be administered through the PAYE system.
You have no obligation to contribute to your employees fund until 01 April 2008.
However, from 01 April 2008 employers will be required to make a contribution to an employees KiwiSaver fund. The compulsory contribution will be as follows:
From 01 April 2008: 1% of the employees gross salary
From 01 April 2009: 2% of the employees gross salary
From 01 April 2010: 3% of the employees gross salary
From 01 April 2011: 4% of the employees gross salary
If an employee does not elect to join KiwiSaver no contribution will be required by you.
To help reduce the cost to you of the new compulsory contributions there will be a matching tax credit of up to $20.00 a week per employee. This payment is likely to be administered through the PAYE system.
Therefore, in the first year there will be no net cost to you on the first $2,000 a week of wages paid per employee. So at 4% (2011/12) there will be no net cost on the first $500 a week of wages paid per employee.
It is anticipated the net additional costs to employers by 2011/12 will be no more than around 1% of the national wage and salary bill at that point.
What does it mean for employees?
For all new KiwiSaver accounts the Government will tip in a $1,000 sweetener. There is also a limited first-home subsidy available (up to a maximum of $5,000 - $10,000 per couple).
As announced in the 2007 Budget, there is a further Government contribution of up to $20 per week matching, on a dollar for dollar basis, contributions by employees.
The Government contribution is paid annually at the end of each financial year into the employees KiwiSaver account. This takes effect from 01 July 2007.
Self-employed/shareholder employers will also qualify for the contribution.
Should employees sign up for KiwiSaver?
Given the free money on offer, it would appear the answer is: Yes
There is the one off $1,000 up front gift, plus the maximum $1,040 per year gift, plus the 4% contribution from the employer. So if the employee gross’s $500 per week their $1,040 contribution turns into $3,120 every year, plus the up front $1,000 gift.
Additionally, under certain circumstances employees are also able to direct up to 50% of their contributions to pay their mortgage.
So, if they are on up to $1,000 per week they could divert up to $1,040 per year to their mortgage and still have $4,106 in their KiwiSaver account. (Government contribution $1,040 + employer contribution $2,080 (4% of $52,000) + 50% of their own contribution $1,040).
We will report back soon with other examples of the impact for employers and employees.
