Savings ‘holiday’ too fun by half
It’s time to overhaul the rules for KiwiSaver contribution ‘‘holidays’’ as the number taking them continues to rise, the Commission for Financial Capability says.
More than 127,000 people are on KiwiSaver contribution holidays, making no regular savings from their salaries.
And many don’t plan to start saving again for some time, with nearly 107,000 having opted for the maximum five-year holiday.
Taking contributions holidays imperils people’s ability to save enough for retirement, said the commission’s David Boyle, and the use of the term ‘‘holiday’’ may be inappropriately positive.
‘‘A contributions holiday is a terrible name because it gives you a positive impression,’’ Boyle says.
‘‘A holiday is a good thing, isn’t it? A holiday reminds me of the sun, of the beach, and those are really good things. But taking a KiwiSaver contribution holiday is not a good thing. You miss out on employer contributions, and the member tax credit.’’
The member tax credit is an annual incentive paid by the Government to active KiwiSavers. It can be as high as $521.43 for those who save enough in a year.
Saving too little for retirement could mean people not being able to do the things they wanted, like spending time at the beach.
‘‘The only time you are going to see the beach is on a picture postcard,’’ Boyle said.
The commission is preparing a report to be tabled in Parliament in December recommending changes to New Zealand’s retirement policies.
One recommendation will be to make people who opt for KiwiSaver holidays reapply each year. Currently, they only have to do so every five years.
Another will be that people on contribution holidays get sent a letter each year setting out what they have missed out on, and how much they would have saved, had they contributed.
The third recommendation will be to drop the use of the word holiday, and replace it with a less positive name.
Boyle said the commission had found the majority of people coming to the end of a five-year contribution holiday applied for a further five-year holiday.
There may be a number of reasons behind people opting for long holidays, including the rise of the mega-mortgage.
‘‘People who have used KiwiSaver to buy their own home are wanting to get that mortgage down given the amount they are borrowing. That makes sense, but there’s a loss to it,’’ Boyle said.
Currently about $300 million worth of member tax credits are not earned each year.
‘‘It drives me nuts,’’ Boyle said.