Thousands of New Zealanders are adjusting to a higher KiwiSaver contribution rate, but nearly 5,700 have already opted to reduce their contributions, foregoing the benefits of the increase. The default contribution rate rose to 3.5% on April 1st, as part of a phased plan to reach 4% by 2028, a move designed to bolster retirement savings for a generation of New Zealanders. Yet, the change isn’t seamless, and a small but notable number of individuals are actively choosing to contribute less, raising questions about awareness and affordability.
As of Tuesday, Inland Revenue reported 5,696 people had applied for a reduction in their KiwiSaver contribution rate, a figure that is expected to climb as more paychecks reflect the new default. This adjustment means these individuals will not be contributing at the higher 3.5% rate, potentially impacting their long-term financial security. Understanding the changes to KiwiSaver and their implications is crucial for all members.
Awareness and Affordability Concerns
The number of opt-outs, while representing less than a quarter of one percent of active KiwiSaver members, according to Kernel founder Dean Anderson, highlights a potential gap in public understanding. Anderson noted, “I’m not sure how many Kiwis were actually fully aware of the changes that were coming. I think the real awareness will kick in when the next payslip arrives and people notice a slightly smaller deposit in their bank accounts.” This lag in awareness could disproportionately affect those on fixed incomes or “total remuneration” contracts, where a single payment encompasses both salary and employer contributions.
Rupert Carlyon, founder of Kōura KiwiSaver, wasn’t surprised by the number of reductions. “I don’t think people realise what is happening or how they can get out of the change,” he said. Carlyon’s firm sent out multiple email notifications about the increase but received surprisingly little feedback. He suggests the onus may be on employers to ensure their staff are informed. “I wonder whether employers have been communicating with their employees, it is at this level that more probably needs to be done rather than through the KiwiSaver providers.”
The Long-Term Impact of Higher Contributions
The government has projected significant long-term benefits from the increased contributions. For a working parent aged 25 with a $60,000 income, two children, a year of parental leave, and a plan to purchase a home at age 30, the new rates are estimated to result in a retirement fund exceeding $500,000 by age 65, compared to just under $400,000 previously. The benefits are scaled to income, with high-income earners projected to see a 28% increase in their final balance and low-income earners a 21% increase.
However, the immediate impact of the 0.5% increase is being felt by both employers and employees. Jessica McLean, chief operating officer at PaySauce, described a surge in support requests from employers confused about the implementation of the new rate. “What we have seen is a huge influx of support volume… about things like ‘the new rate is applying already but it shouldn’t, it’s from the first of April’ but you’re paying it on the first of April so it applies,” she explained. The complexities are particularly acute for companies offering “total remuneration” packages, where the employer sets aside a fixed amount to cover both salary and KiwiSaver contributions.
Employer Challenges and Employee Options
When the KiwiSaver rate increases, the money must come from somewhere – either the employer absorbs the cost or it’s deducted from the employee’s net pay. McLean noted that some employers are willing to cover the additional cost to avoid reducing employee grab-home pay. She also indicated that some employers have inquired about negotiating temporary rate reductions on behalf of their employees, though such reductions must be initiated by the employee themselves. “It’s got to be employee-led… but I think there’s this narrative that small employers are always trying to pay people the least they possible can and I don’t think that’s true. I think most of them are fine with the change.”
For those struggling with the increased contribution, it’s important to remember that temporary reductions are available through Inland Revenue. Individuals can apply for a contribution holiday or reduce their contribution rate to as low as 2% under certain circumstances. However, it’s crucial to weigh the short-term financial relief against the long-term impact on retirement savings.
The staged increase to 4% by 2028 is intended to provide a gradual adjustment, but the initial response suggests a need for greater clarity and communication. The next key date for KiwiSaver members is April 2025, when the contribution rate will increase again, further emphasizing the importance of understanding these changes and planning accordingly.
Disclaimer: This article provides general information about KiwiSaver and is not financial advice. Consult with a qualified financial advisor for personalized guidance.
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