As expected KiwiSaver turned out to be a soft target to balance the books for Budget 2025.
Finance Minister Nicola Willis announced today (May 22nd) a few key changes that will be good for some, bad for others and plain ugly for a few too.
First things first. If you haven’t already made the threshold to receive the maximum Government contribution of $521 for this KiwiSaver tax year (NOTE: it runs July 1, 2024 – June 30, 2025) make sure to do so. This will be the last year to receive that generous top-up.
Will I make the cut off?
If you’re a wage and or income earner on a decent wicket, chances are you’ve already saved enough. But just in case, check with your KiwiSaver provider OR Inland Revenue using MyIR website.
You’ll need to have contributed $1,043 out of pocket between the dates outlined above to meet the threshold. You’ll also need to have been invested for a minimum of 12 months and be over the age of 18. There is a prorated amount for those in KiwiSaver less than a year.
Time slips away, so if you’re self-employed, on maternity leave or have been off the grid travelling, check it immediately.
So what’s changing?
From 2026, the Government contribution of $521 will be cut in half. So it’ll shrink to 25 cents for every dollar (from 50 cents) up to a bonus $260.50. If you earn more than $180k a year, you’ll now also be ineligible, after this KiwiSaver year anyway.
Default contribution rates will rise from 3% to 4% over two years to give people time to adjust. The first year it’ll be 3.5% and then 4% the following. This applies to both employees and employers.
Those barely scraping by will feel this. For those who can manage it, the long-term benefit will be strong. If you doubt it, try using the KiwiSaver calculator on Sorted. While you’re there, you can test the effect of different fund types and their returns over time. One per cent does indeed make a difference and in this case, it’s 2%. Remember, Aussies contribute 12% from July this year.
There will be a temporary opt-out period to maintain the default rate of 3%.
I’m personally not opposed to making contribution rates higher but let’s be honest, most New Zealanders are struggling to make ends meet. Maybe that’ll change in a year, but maybe not. I’m also not opposed to getting employers to pay more, but let’s be brutally honest here too. Most will just adjust for that in salary packages unless they’re a business doing well and want to attract and or retain top best talent.
There are precious few employers that pay 10% KiwiSaver contributions so if you’re lucky enough to be one of those, work hard(er) and don’t lose your job. Those who can’t keep up with a higher savings rate can take a saving suspension, so they can return when they are in a better position to do so. See how here.
On the face of it, these changes don’t look half bad. Our savings rate in New Zealand is horrible and we have far to go to catch up with Australians, Canadians, Americans and Brits on that front. See my post on comparative rates here.
What I find most objectionable about these latest changes is they impair KiwiSaver as a trusted brand. Each new Government simply can’t resist tampering. That’s going to have a price at a time when it was becoming better understood and considered a reliable savings vehicle. While it is still a safe option, its original charm is gone.
The glorious past
When it was rolled out in 2007, KiwiSaver came with a $1k kickstart and a matching $1,000 Government contribution. At the time, it was a no-brainer to enrol and those sweeteners drove a huge uptake in KiwiSaver, making it the success it is today. There are close to three million KiwiSavers with more than $100 billion combined.
By anyone’s calculation, it’s been a huge hit. Ask any fund manager. Last year, fees on KiwiSaver were more than $789 million, a 19% increase over 2023.
Choosing not to extend the Government contribution to those earning more than $180k will take away any incentive for those high earners to invest in KiwiSaver now. Sure, you could argue it’s a good vehicle for saving for your first home but you can do that outside of KiwiSaver in a managed fund. The ‘rich’ are a good target but earning $180k a year sadly isn’t the fortune it sounds, not at least in Auckland.
There is no longer a good argument for those on a higher wage to enrol in KiwiSaver. If you’re already in it, the returns are decent and you’re not paying too much in fees, there’s no good reason to stop investing. You might as well keep going, particularly if you’re employer is going to be paying 4%.
Still, for some newcomers on a high income, the inconvenience of being locked in till age 65, KiwiSaver will be a questionable choice. In most other OECD countries, there’s an incentive of one kind or another to contribute to KiwiSaver or its equivalent. Reduced personal tax burdens are one of them.
The one flicker of light here is that Government contributions will now be extended to 16 and 17-year-olds to spark their interest in saving earlier. If they’re working, they’ll also get the benefit of employer contributions. The former takes effect from July 1, 2025, with the latter April 2026 so employers will have time to organise themselves.
So working kids who care about saving (most likely via switched-on financially literate parents pushing it) will benefit from Budget 2025. Ironically, the good news will wash over the vast majority of them. Most kids this age simply do not care or don’t understand KiwiSaver. Sadly that’s also the case with many parents.
Hopefully, with mandatory financial literacy coming down the track, teachers will preach to kids about the benefit of compound interest and KiwiSaver will work in their favour earlier now.
If any of the other budget items help to jump-start our ailing economy, perhaps the middle of the pack will see a longer-term benefit by paying more into their futures (employee and employer rates rising) without feeling the pinch.
It’s unfortunate New Zealand’s financial health is such that this current Government turned to KiwiSaver to carve off some cheap savings ($400 million I understand) when it’ll come at the expense of all the goodwill and trust in the brand over the last 17 years.
My reoccurring message to people who want a better financial future for themselves is to start caring MORE, to make smarter decisions, and not to rely on Government policies to see them through. A higher standard of education will become imperative for our youth and those whose finances are still salvageable.
No doubt, Australia will continue to be a strong pull for our youth and those ever wanting to afford a home in their home country in this lifetime. Who would blame them?
