KiwiSaver 101: How Does It Work, and Why Should Students Care?
KiwiSaver is a New Zealand government initiative to help individuals save for retirement. While many people may not think about retirement savings during their university years, KiwiSaver can be a powerful tool for students, offering benefits that can enhance their financial future. This article will break down what KiwiSaver is, how it works, and why students should care about joining and contributing to this program.
What is KiwiSaver?
KiwiSaver is a long-term savings plan that helps New Zealanders build a retirement fund through regular contributions. While it serves multiple purposes, its primary goal is to provide a lump sum at retirement age to cover daily expenses. When an individual joins KiwiSaver, contributions are invested in various funds managed by KiwiSaver providers. Individuals can choose a type of fund, such as conservative, balanced, or growth funds, depending on their risk tolerance. These funds are invested in various assets, including shares, bonds, and cash, to grow savings over time.
How Does KiwiSaver Work?
KiwiSaver works by allowing individuals to contribute a percentage of their income. There are different ways to contribute to KiwiSaver:
Employee Contributions: For individuals in paid employment, contributions are typically deducted automatically from their wages. Employees can contribute 3%, 4%, 6%, 8%, or 10% of their gross salary. If you're self-employed, you can make voluntary contributions based on your income while also benefiting from the government contribution, provided you meet the minimum threshold.
Employer Contributions: Employers must also contribute to their employees' KiwiSaver accounts. By law, the employer must contribute a minimum of 3% of the employee's salary or wages, but some employers may choose to contribute more. However, from 1 April 2026, the default KiwiSaver contribution rate for employers will increase from 3% to 3.5%.
Government Contributions: With the recent KiwiSaver changes, the government contribution has been reduced to 25 cents for every dollar you contribute annually, lowering the maximum contribution to $260.72. Individuals earning over $180,000 in taxable income per year will no longer be eligible for the government contribution.
When Can You Use Your KiwiSaver?
There are four key situations where you can access your KiwiSaver savings:
Retirement: The primary purpose of KiwiSaver is to help you save for retirement. You can access your funds when you reach the age of 65, allowing you to use the money you've saved throughout your working life.
First Home Purchase: After contributing to KiwiSaver for at least three years, you can use your savings (including your employer's contributions) to help purchase your first home.
Severe Financial Hardship: In cases of severe financial hardship, such as being unable to meet basic living costs, you may be eligible to withdraw funds from your KiwiSaver account to help get back on track.
Moving Overseas: If you move overseas permanently, you have options for your KiwiSaver funds. If you relocate to Australia, you can transfer your balance to an Australian superannuation fund. For other countries, after living abroad for a year, you can withdraw your funds (excluding government contributions) or transfer them to an approved foreign superannuation scheme.
The Importance of Starting Early
For students, joining KiwiSaver early can have significant long-term benefits. Because KiwiSaver is a long-term savings scheme, the earlier you start contributing, the more time your money has to grow through compound interest. This means that even small contributions can add up over time, making the compounding effect highly beneficial. For younger savers, like students, the long investment horizon before retirement means they can afford to invest in higher-growth assets, such as shares, which offer the potential for higher returns. This means that starting early accelerates your savings growth and allows you to take advantage of market growth over many years.
By beginning to save now, students can build a strong financial cushion for the future, whether it's for retirement, purchasing a first home, or dealing with unexpected financial challenges. The earlier you start, the less you'll need to save in the future to reach your goals – making it an invaluable strategy for long-term financial health.
Why Should Students Care About KiwiSaver?
While retirement might seem far off when you're in university, there are several reasons why students should care about KiwiSaver now:
Free Money from the Government: As mentioned, if you contribute to your KiwiSaver account, the government will also contribute up to $260.72 each year, provided you meet the minimum contribution requirements. This is free money that can significantly boost your savings.
Employer Contributions: If you're already working part-time or a summer job, your employer must also contribute to your KiwiSaver account. Any money you contribute is effectively supplemented by your employer, helping you build your savings faster without additional effort.
Tax Benefits: KiwiSaver contributions are deducted from your income before tax, reducing your taxable income and lowering the amount of tax you need to pay. Additionally, the growth on your KiwiSaver account is tax-free, so you won't have to pay tax on the returns from your investments.
First Home Purchase: One of the additional benefits of KiwiSaver is that, after contributing for a minimum of three years, you can use your KiwiSaver savings to help purchase your first home. This could be a significant benefit when you buy your first property.
How to Get Started
Getting started with KiwiSaver is easy. You can opt into KiwiSaver through your employer if you are already employed. You can also choose a KiwiSaver provider and select the fund that best suits your risk tolerance and goals. Students should make it a priority to choose a provider and fund type that suits their financial goals. If unsure, seeking financial advice or comparing different KiwiSaver schemes might be helpful.
If you are unsure or require help, you can find more information about KiwiSaver on https://www.ird.govt.nz/kiwisaver.
Opinion by Sirina Sobti