Everything you wanted to know about KiwiSaver changes for April but were afraid to ask or didn't know where to look.

By Amanda Morrall

Effective this month, employee and employer contributions into KiwiSaver will rise from 2% of gross earnings to 3%. If you are a salaried employee or wage earner the adjustments will be made automatically by your employer so you needn't worry about doing anything at your end apart from getting used to a smaller pay cheque. In lieu of my regular cornucopia of personal finance links, I thought I'd review the changes, what the financial implications are and what you might want to do at this time with your KiwiSaver account.

1) How much?

As has been well signalled by the National Government, contributions are moving from 2% to 3%. How much of a difference it will make obviously depends on how much you earn. Taking the median annual income in New Zealand of $42,025 or $808 a week, it means your contributions will go from $840 a year to $1,260, a $420 a year difference. Okay, an extra $420 a year is nothing to sneer at however when you break it down per week that's an extra $8 a week. Remember your employer will also be chipping in that amount so you'll be diverting $840 more a year into your nest egg than before.  

A little highlighted bonus here of the extra contributions is that whereas previously you had to be earning $52,150 or more to receive the full member tax credit from Government (now $521 a year), the change means that those earning $34,767 or more (contributing at 3%) will now be entitled to that full member tax credit. So there's a slight gain here too for many KiwiSavers.

For someone earning $52K a year, it means an additional $520 per year in contributions as they shift from $1,040 to $1,560. And for those making $30K, the difference will be around $300 per annum or approximately $5.80 a week.

2) Budgeting for change

As I mentioned in my TVOne interview this morning, my guess is that middle to high income income won't really notice a big difference. If they do, it'll be a matter of cutting back on small luxuries. In caffeine terms: the equivalent of two store bought coffees a week. The impact will in all likelihood be felt harder for those at the lower end of the pay scale for whom $5-$8 a week is a bigger deal. For folks on an already tight budget, this is an ideal time to review and renew, so you won't be short on paying non-negotiable expenses i.e. rent and power. It could be that the Sky subscription will have to go, or the smoking, or one less night out a week at the pub. 

Start by combing through your monthly expenditures and divide into essential and non essentials and look for the fat. One month probably isn't enough to establish patterns of spending so make a night of it and undertake a three-month review. If you're in a relationship and you have joint finances, I recommend you do this exercise as a team. If personal finance is something you both see as boring and dull and something to be avoided, time to turn your thinking around. See this instead as an opportunity to open the lines of communication, to work towards a common goal perhaps and put in place a plan of attack. 

3) Get informed

Even if you have the budgeting well in hand, this is a prime time to check in with your KiwiSaver.

If you don't know the answers to the following questions, I suggest you start doing some homework.

1) Who is your provider? Basic but actually some people I know, don't know.

2) What is your balance?

Average balances across KiwiSaver were, as of March 31, 2012, $6,668. The average balance in a default fund was $6,500. In 2010/2011 median annual contributions by wage and salary earners (excluding the employer contribution) was $829. Remember that to benefit from the maximum member tax credit of $521 a year, you need to contribute $1,043 of your own money or just over $20 a week.

Where you can check your balance?

a) Open and then read that last statement you received.

b) Phone your provider and ask. Alternatively register for their on-line systems, bookmark it and don't lose your password.

c) Check through the IRD's KiwiSaver website. You use the same log-in for other IRD on-line services.

3) What fund are you in? Is it a default fund, a conservative, balance or growth fund? Don't know the difference? Read this. 

4) Is this the right fund for you? If you are in KiwiSaver for the express purpose of using your savings to purchase a first time home, being in a higher risk growth or aggressive fund that is more vulnerable to market shocks is probably not a great idea. Also if you have no appetite for risk whatsoever, being in a growth fund may not be ideal. One size does not fit all and the type of fund you are invested in will depend on a whole range of factors including your age, your investment objectives, your risk appetite and your reasons for being in KiwiSaver. 

5) What kind of returns are your netting?

I get asked quite often to rate this provider or that provider. Regular readers will know I can't and if you don't know why I recommend you buy my book. Sorry shameless plug.

Under new periodic reporting requirements also being introduced this year, providers will be required to report on things like fees, performance, asset allocation and investment management styles in a consistent, standardised way which should make understanding this investment product easier for average users. But obviously it's difficult to judge whether your returns are good, bad, ugly or average unless you compare them to others in their peer group. Remember you can't fairly compare the returns from a conservative fund to a growth fund as the asset allocation is totally different.

How can you do this without blowing a fuse in frustration?

It's easier than you think. Go to Morningstar's website and check out their KiwiSaver quarter reports and drill down to peer group averages to get an idea for average returns across the main types of funds on offer. Then when you are done that you can start comparing that average return to what you are getting (across the same period of time - longer is better) and compare that with other similar funds on offer from competitors. You can also do that by reading Morningstar's KiwiSaver section or by checking out the data on interest.co.nz's KiwiSaver section under performance ranking. We even make it easy for you by offering you an option to link directly to other funds like yours. Tip: It's the fourth line down for the top, once you find your fund and its profile. 

4) Fees

As reported a few months back by my colleague Craig Simpson and I, the fees you pay in KiwiSaver are no small potatoes. Collectively, we've paid fund managers and related parties more than $440 million since the inception of KiwiSaver in 2007. How much you personally pay in fees is hugely variable. It depends on your provider, the kind of fund you are invested in, how it's managed and by whom. Yes, I would agree this is not the sexist subject in the world but as it will impact on you in a not insignificant way over the long run I suggest you take an interest.

It's not just the annual membership fee of $40 odd bucks a year you pay. Fees are paid to managers as a proportion of your balance that comes out every year regardless of performance. We have heaps of information on fees on our website, so start exploring it and as with performance do it on a comparative basis so you have a clue about whether it's high, low or average. 

See also interest.co.nz's fee calculator to estimate the long-term cost of fees as expressed as a proportion of your savings.

Sorted.org.nz offers something similar as well in terms of fees.

5) How much is enough?

If you are like me, you may panic that you'll end up living off the smell of an oily rag in retirement. Actually my default plan is to live off water and rice on a mountain top, hopefully in a well insulated yurt or teepee.

But seriously, there are many unknowns about growing old, least of all if you'll grow old in the first place. The common argument among financial planners (and I would agree with this) is that it is better by far to be over prepared than under. 

How much you save will depend on how old you will live, whether you will be healthy in old age, how you choose to spend your time in old age and also who you are sharing it with. All these factors should be born in mind when targeting savings amounts and the kind of returns you'll want to generate to beat inflation and tax. Check out Sorted.org.nz's retirement planner calculator here.

The view taken by the Financial Services Council (qualifier: they represents the savings industry) is that at the commencement of your journey into paid employment you should be setting aside 10% of gross income. The longer you wait to start saving the higher the percentage of pay will be required to be diverted to savings.

Bottomline: 

Save early, save often and make sure you know where your savings are going and how they are tracking along.