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Traps for KiwiSaver Home Buyers

Traps for KiwiSaver Home Buyers

One of the best incentives for young people to join KiwiSaver is the ability to withdraw funds for the purchase of a first home. All but $1,000 can be withdrawn providing certain criteria are met. You need to have been a KiwiSaver member for at least three years and you must not have owned property before unless special circumstances apply. A Home Start grant of up to $5000 per person for an existing house and $10,000 for a new house is also available if your income and the value of the house you are buying are within certain limits, and you may also be eligible for a Welcome Home Loan, for which you only need a 10% deposit.

There are some traps to watch out for. If you purchase or inherit a piece of land on which to build a house, after that time you will not be a first home owner and you will not be able to withdraw your KiwiSaver funds. Funds transferred into your KiwiSaver from an Australian superannuation scheme are not available to purchase a house. To be eligible for a Home Start grant, you need to have been a contributing member of KiwiSaver for three years or more. If you stop work, for example by going on maternity leave, you may need to keep up contributions at a reasonable level to stay eligible. This can be done by contributing $20 a week directly to your KiwiSaver fund. It can take up to a month to process a Home Start grant and it is best to apply for a pre-approval for both the Home Start grant and Welcome Home Loan to make sure you are eligible. The pre-approval will last for six months, giving you time to find house with the knowledge that you have finance available.

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Choosing the Right KiwiSaver Options

Choosing the Right KiwiSaver Options

Joining KiwiSaver is a no-brainer and there are now around 2.6 million members. There are three key decisions to be made when joining; the contribution rate, the investment option and the provider. It’s best to make the decisions in that order. Your contribution rate should be set at the rate that gets you closest to an annual contribution of $1,042 which will then give you the maximum annual tax credit of $521. If you want to save more, save into a diversified fund which is not locked in.

The key determinant of your investment option is your investment time frame. The range of options is usually something like Defensive, Conservative, Balanced, Growth and Aggressive. The longer your time frame, the more you should invest in growth assets (property and shares). Aggressive funds have the highest exposure to growth assets and Defensive funds have the lowest. While growth assets are more volatile in the short term, they will give a higher return than income assets (cash and fixed interest) over the long term. Note that your investment time frame doesn’t finish on the day you retire; it finishes on the day you decide to spend your money. Many retirees are choosing to leave their KiwiSaver invested as a reserve fund for later in retirement. This means that even at age 65, they might still have a long investment time frame before they spend their funds.

Once you have decided on the best mix of growth and income assets, you can compare providers to see which ones have the best performance, after the deduction of fees, for that kind of fund. Don’t be hung up on fees alone; there is nothing wrong with paying more in fees if the provider produces a better performance net of fees. It’s the bottom line that counts!

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KiwiSaver for Retirees

Retired CoupleKiwiSaver for Retirees

A recent survey conducted by the Financial Markets Authority and the Commission for Financial Capability found that around a quarter of people are not sure how to manage the money in their KiwiSaver funds after the age of 65. There are variations between different scheme providers and once you turn 65, providing you have been in KiwiSaver for five years, you should ensure you understand what your options are. As well as withdrawing your funds in full or leaving your funds invested, you may be able to set up a regular withdrawal, arrange a partial withdrawal, or add more money. There are a number of considerations when deciding what to do. If you are still working after the age of 65, you will not receive the annual tax credit and your employer does not have to contribute 3% of your pay. However, many employers offer to keep contributing and you should retain your KiwiSaver fund while contributions continue.

After that point, the decision as to whether to leave your funds in KiwiSaver will partly depend on what other retirement savings you have accumulated. You should plan to still have funds invested at the end of life, and this could be for a period of thirty years. Your KiwiSaver fund can be a convenient way to invest part of your savings for the longer term. You might even want to consider adding some of your other funds into KiwiSaver to take advantage of the low fee structure. It is important to check the investment profile of your fund to ensure it is appropriate for the investment term and your risk profile. Investing in a fund that has exposure to growth assets (property and shares) will help keep you ahead of the effects of inflation and tax over the long term.

 

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KiwiSaver Kickstart Kill-off and Kids

DeadKiwiKiwiSaver Kickstart Kill-off and Kids

The Government Budget announcement that the $1,000 kickstart for KiwiSaver has been terminated with immediate effect is no surprise. From a marketing perspective it was an enticing carrot in the early days of KiwiSaver when there was considerable sceptism about the Government’s intentions with KiwiSaver and the benefits of being enrolled. The majority of the working population are now enrolled and have seen for themselves the wisdom of this choice. There is a hard core of people who have not yet been enticed, some of whom may simply not be able to afford the minimum contribution and some of whom will never be convinced to join anything that is under the influence of Government policy. For such people, the $1,000 kickstart is no incentive.

Many parents signed up their children simply to get a free handout. The termination of the kickstart will no doubt put an end to this practice and it can be argued that is a good thing. Committing your child to a lifetime of KiwiSaver membership without their knowledge or understanding takes away their freedom of choice and teaches them little about how to make good financial decisions. The Green Party have proposed that all children be automatically enrolled in KiwiSaver at birth and that parents be encouraged to save into the account with matched Government contributions of up to $200 per year. Without incentives, the fact remains that for most people the best use of surplus funds is debt reduction. Short term debt is the biggest barrier to home ownership, mortgage reduction and saving. Perhaps it is better to apply Government funds to improving financial literacy so that parents are in a better financial position through home ownership and low debt levels to help their children. Knowledge is a far more valuable gift than cash handouts.

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KiwiSaver for Kids

KidsKiwiSaver for Kids

Joining KiwiSaver is a sensible decision for most eligible people between the ages of 18 and 65. There are currently around 2.4 million KiwiSaver members of whom around 360,000 (just under 15%) are under the age of 18. Clearly, many parents, or in some cases grandparents, have signed their children up for KiwiSaver. There are differing points of view as to whether this is a good thing for family members to do.

On joining, a child receives the Government ‘kickstart’ of $1,000. Children under the age of 18 do not receive the annual tax credit of up to $521, and, once enrolled, cannot opt out. If they are employed, they must contribute a minimum of 3% of their pay, yet employers are not required to make contributions. If they are not employed, they, or their parents, can make voluntary contributions to KiwiSaver at any time, however the funds will be locked in until retirement age unless the member is buying a first home, emigrating, or suffering financial hardship or serious illness.

The advantages of signing a child up for KiwiSaver are that they receive the $1,000 kickstart and parents or grandparents can contribute to the fund in the knowledge that the child is unable to withdraw the funds unless eligible to do so. The disadvantages are that the child cannot opt out of KiwiSaver later in life and must make contributions to KiwiSaver when employed unless a contributions holiday is requested. For students and those on low incomes this may not be a desirable outcome. It can be argued that a child, on reaching the age of 18 and being entitled to the full benefits of KiwiSaver, should decide for themselves whether they wish to join rather than having that decision thrust upon them by well-meaning relatives at an earlier age.

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Review your KiwiSaver

Investment reviewReview your KiwiSaver

Your KiwiSaver investment should be reviewed on an annual basis and June is the best time to do this for a number of reasons. The Government tax credit of around $521 is paid into your KiwiSaver account every July, and the amount you receive will be based on your contributions for the year ended 30 June. To receive the full amount of tax credit, you will need to have contributed around $1,042 between 1 July, 2013 and 30 June, 2014. You can make a direct contribution into your KiwiSaver account to top it up if required.

June is also the time to make sure that the tax rate for your KiwiSaver is correct. By now, you should know what your taxable income was for the last two years, and this will determine your PIR (Prescribed Investor Rate). The tax you pay on KiwiSaver is a final tax and if your tax rate is set too high, you will not be able to get a refund, so it is important to make sure the tax rate is correct.

Every year you should review whether your chosen investment option is still appropriate. The difference between options such as Conservative, Balanced and Growth is the weighting given toward income assets (cash and fixed interest) and growth assets (property and shares). A recent survey of KiwiSaver funds by Mercer shows that over the last 5 years, the average rate of return for Conservative funds is 7.79% per annum, compared with 10.22% for Balanced funds and 12.27% for Growth funds. While Growth funds offer the highest rate of return over the long term, they are more volatile, which means that from year to year the return can vary widely and may even be negative. Choose an option that matches your attitudes towards risk and return.

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Transferring Your Australian Superannuation

AustralianCoinTransferring Your Australian Superannuation

While it is now possible to transfer funds from your Australian superannuation scheme to KiwiSaver, this is not something that should be done without consideration of a number of important factors. There are many good reasons to bring your superannuation home. Having investments in more than one country can make life more complicated than necessary, and if your Australian superannuation is a relatively small amount, you may choose to transfer it just for simplicity. Access to informed, personalised financial advice on your investments is another good reason to transfer. Bringing your funds back reduces your exposure to exchange rate fluctuations, however the transfer value will be impacted by the exchange rate at the time of transfer.

There may also be good reasons why you might choose to leave your superannuation in Australia. Have a look at the benefits you are entitled to from your Australian scheme. At what age are you able to withdraw the funds? Are there additional benefits such as life insurance or income protection insurance included with your investment? Is there a guaranteed value at retirement age? What is the fee structure? Will there be a fee charged if you transfer? There are also tax considerations. In Australia, the earnings on superannuation schemes are taxed at a flat rate of 15% however there is a capital gains tax. For KiwiSaver, the earnings on your investment will be taxed at your marginal tax rate up to a maximum of 28% but there are benefits in how capital gains are taxed.

Having decided you wish to transfer your funds, check with your KiwiSaver provider that they are able to accept your funds and establish if there is any fee involved. You can change your KiwiSaver provider if necessary. Transfers are best done with the assistance of a financial adviser.

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KiwiSaver Options for Retirees

HappyRetirementKiwiSaver Options for Retirees

Confusion still reigns for KiwiSaver members reaching the age of 65 as to what to do with their KiwiSaver funds and whether to keep contributing. If you are over 65 and have been a member of KiwiSaver for at least five years, you have several options available.

If you are still working, you can remain a member of KiwiSaver and keep contributing if you wish to, although you will no longer receive the annual Government tax credit. Your employer is not obliged to make contributions once you turn 65, although many employers do, and this is a matter of negotiation.  It makes sense to keep contributing if your employer is willing to continue doing so and if it is affordable for you.

Whether you are working or not, you can choose to either withdraw your KiwiSaver funds or leave your money invested without making additional contributions. Some KiwiSaver providers will allow partial or regular withdrawals to be made so the fund can be run down over a period of time to supplement income. If you still have a mortgage or short term debts, consider using your KiwiSaver funds to repay those debts.

While it might be tempting to withdraw your funds and use them for an overseas trip or a new car, especially if the balance is small, this should only be considered if you have sufficient other funds to provide for your longer term retirement needs.

If you leave your KiwiSaver fund invested, the investment option you have chosen should be reviewed. Each KiwiSaver provider offers a range of funds with different combinations of the four investment assets; cash, fixed interest, property and shares. You should ensure that your choice of fund is appropriate for your investment time frame, your financial situation and your attitudes towards risk and return.

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Bring Your Aussie Super Home

KangarooBring Your Aussie Super Home

Spending time in Australia on a working holiday has been part of the Kiwi way of life for many years. The trouble is that since 1992, when it became compulsory in Australia to contribute to a superannuation scheme, locked-in funds have had to be left behind when it’s time to come home. From 1 July, 2013 however, it will be possible to transfer money between Australian complying superannuation schemes and KiwiSaver. Transfers in both directions will be allowed, with a few conditions.

It will be voluntary for scheme providers to accept transfers, so check with your KiwiSaver provider if you want to bring funds back. Until now, Kiwis moving to Australia permanently have been able to cash up their KiwiSaver, however funds will now need to be transferred. Funds transferred into KiwiSaver from an Australian scheme will still be subject to slightly different rules than other KiwiSaver funds. Transferred funds will be locked in until retirement at a minimum age of 60. Australian funds transferred won’t be available for a first home withdrawal, and will not count towards contributions required for the Government tax credit. If you permanently emigrate to a third country, transferred Australian funds will not be able to be taken to that country. Despite these slightly different rules, transferring funds from Australia has advantages. You may have several Australian Superannuation accounts and it may be possible to consolidate them all into one KiwiSaver scheme making it easier to keep track of your savings and plan for the future. You may also be able to save on administration fees by consolidating funds. Converting your savings to New Zealand dollars means you won’t be affected by changes in the exchange rate over time.

Contact your financial adviser to find out more about how to bring your Australian superannuation funds home.

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KiwiSaver Checkup

KiwiSaver Checkup

Around two million Kiwis now have just over $14billion invested in KiwiSaver. No doubt much of that amount is money that would otherwise have been spent. As their fund balances increase, many KiwiSavers are learning that small amounts of saving made on a regular basis over a long time soon build up into a tidy sum. On 1 April, there will be another opportunity to learn, as the minimum KiwiSaver contribution for both employees and employers is increased from 2% to 3%. That means those who are on the minimum contribution will have their take-home pay reduced by 1% of their gross pay. For example, if you earn $50,000 a year, your KiwiSaver deductions will increase from $1,000 a year to $1,500 a year; an increase of around $28.85 a week.

It will be timely to have another look at your budget to see what effect this increase will have. If it is simply not affordable at this time and you have been in KiwiSaver for at least 12 months, you can apply for a contributions holiday of up to 5 years. There is no limit to the number of times you can apply for a contributions holiday and you can renew it at any time. Stopping your contributions should be a last resort option, because you will miss out on your employer contributions and your annual tax credit.

While you are reviewing your KiwiSaver, check that your annual contributions are as close as possible to the optimum amount of $1,040 per annum so that you are neither missing out on part of your tax credit nor locking away more than you need to until retirement. Check too, that the fund you are invested in has an appropriate balance of risk and return for your particular financial circumstances and goals.

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