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Every year, as June 30th approaches, KiwiSaver members are reminded to make sure they have contributed enough to maximise their Government Contribution with news outlets generally touting the exciting headline of ‘Free Money’.
In 2021, the contributions to KiwiSaver accounts from the government totalled $891million, which is a pretty decent chunk of change; however at a rate of $521 per person (assuming everyone received their maximum entitlement) that’s only 1.71 million individuals receiving the Government Contribution. Which begs the question – who is making the most of the Government’s contribution to our retirement and more importantly, who is missing out altogether?
When the FMA released their annual KiwiSaver report for 2021 there were an impressive $3,090,631 members enrolled.
We know that although you can open a KiwiSaver account for children; and can certainly keep it open and invest in it past age 65; only those within the 18-65 age bracket are eligible for Government Contributions. Therefore, we can deduct all KiwiSaver members below and above those ages, totalling approximately 441,900 people, from our equation. This still leaves a whopping 2.65 million members who should, by rights, be earning 50c on the dollar for the first $1042 they contribute each year.
If only 65% of potentially eligible members actually received their entitlement last year, who missed out and why?
There will of course be people who are enrolled but are temporarily not contributing; those who are still earning income but have requested to go on a ‘Savings Suspension’, (previously called a KiwiSaver holiday) or people who are not earning at present, whether due to study, overseas travel or a gap in paid work. These people, we hope, are receiving their Government Contributions most years, but may have missed out in 2021, for whatever reason. Everyone’s income ebbs and flows over their lifetime as they, well, live their lives – so a missed entitlement on occasion is nothing to be concerned about at a national level.
It’s the people missing out year on year, to a potential maximum of $25,000 missed over a lifetime, that we should be worried about.
Those people fall into three main categories, low wage earners who are contributing through their payroll but are just falling short of the $1042 each year, self-employed individuals who aren’t making the necessary voluntary contributions, and surprisingly – stay at home parents. This last portion makes up 23% of non-contributing members, of which the majority is women, further contributing to the gender wealth gap in New Zealand.
The Government is considering a raft of suggestions from different sources, including the Commission for Financial Capability and the Retirement Commission on how to improve KiwiSaver, and some of these changes will likely either increase the dollar value of the Government contribution or alter the rules around who qualifies to receive it. Currently of course self-employed people are much less likely to contribute, especially in a regular way, as there is no equivalent incentive to the employer contribution for them. Many of the strategies that would motivate this group to contribute more meaningfully will have a counterproductive effect on the low wage earners, meaning the government needs to think carefully about whose financial futures they want to protect and improve and at what cost.
First of all, the best and most accurate place to check your KiwiSaver contributions is by logging in to MyIR, the IRD portal. Although your provider will in most cases show you whether you have contributed the $1042 since last July, the catch is that if you have changed provider within the last 12 months there may be a discrepancy between the contributions they have tracked and your actual level.
Secondly, if you are in a position to make a one-off voluntary contribution between now and June 30th, absolutely do so to ensure that you get your entitlement this year. Understandably for many people, making additional contributions may not be within the budget, particularly the roughly 50% of non-contributors who have an income below $30,000pa. For those who are on minimum wage, working full time and contributing 3% they should just have made sufficient contributions to qualify for their full entitlement – but it’s close. For those on minimum wage who are working less than full time hours they may find despite contributing each pay that they fall short. On top of this, with the cost of living in NZ skyrocketing to new heights there is even less available spare cash for people to top up their KiwiSaver funds this year. If you’re not sure whether scraping the barrel to top up your KiwiSaver is worthwhile; have a chat to your adviser or KiwiSaver provider - but remember, once in KiwiSaver the money is locked away, so look at the big picture before acting!
The last recommendation for those who tend to miss out, but can genuinely afford to be contributing $1042 annually, is to set up a regular contribution rather than dump in the money each June, in order to get the benefit of regular returns through the year.
The practice of spreading your investment across regular, consistent, contributions is termed ‘Dollar Cost Averaging’. The goal of this approach to investing is to manage the risk for investors and make the most of any market volatility, and is in fact what happens with your KiwiSaver if you do contribute through your payroll. There are two parts to the success achieved by investors who use dollar cost averaging – the first is that by contributing the same dollar amount each time you automatically buy more of the investment when the market drops (prices are low) and buy less when the market is rising (prices are high). This buy low-sell high mantra is one of the key investing principles which investors are taught to follow; and dollar cost averaging does it for you.
The other way in which regular contributions work in the investors favour is by removing the idea of ‘timing the market’ from the process. Many people making a lump sum will overthink the timing of this investment, seeking either to avoid a market drop or time it for a rising market. Unfortunately the likelihood of an experienced investor, much less a regular individual, to successfully time the markets is slim.
If you’re aiming to improve your investment approach going forward, look at setting up a regular deposit into KiwiSaver, either $21 per week, $41 per fortnight or $87 per month starting from 1 July this year.
By taking this step, not only do you avoid the possibility of forgetting to contribute and missing out, but on top of your $521 from the Government you will have maximised your own investment returns across the next 12 months.
Talk to us
If you’d like to understand dollar cost averaging a bit better and find out what else you could be doing to maximise your KiwiSaver, get in touch and we can have a chat about your specific situation and how we can help you achieve financial success for the future.
Elizabeth
Disclaimer: Elizabeth Tsikanovski (FSP693611) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Elizabeth’s disclosure statement on our website.