KiwiSaver benefits and the downsides of term deposits
For employed people, a key benefit of being part of KiwiSaver is that their employer also contributes to their savings.
But the scheme still has lots to offer if you are self-employed – or even not employed at all.
If you contribute at last $1042 a year, the Government will put $521 into your account. That’s a 50 per cent return on your money.
Whether you put in more than $1042 a year is up to you. You could opt instead to invest the money somewhere that puts no limit on when you can access it.
KiwiSaver won’t let you tap into your account until you are 65. That’s a benefit if you know you might blow the money when you shouldn’t, but a negative if you might need it before that time.
As for how to go about joining a scheme, there’s a few ways to check what’s available. Sorted offers a Fund Finder tool that helps you decide what type of fund is best for your circumstances, and then compare the options.
You can also look at information such as Morningstar’s quarterly survey of KiwiSaver schemes.
Once you decide what scheme you want to join, head to that company’s website. Most make it pretty easy to click through and join. You’ll need your IRD number.
If you pay PAYE on your income from your business, you will then need to make a contribution of
3 per cent of your income for a year, plus 3 per cent as an employer. After a year you can go on a contributions holiday and just contribute what you like.
If you don’t receive income that is subject to PAYE, you’ll be able to contribute whatever amount you choose from the start.
Term deposits no longer offer the type of interest rates that they once did. It used to be possible to put a lump sum into a term deposit and generate enough interest to live off the income – or at least use it to supplement your other earnings.
Now the best you can get on a two-year rate is 3.85 per cent, according to depositrates.co.nz – and you’re locking your money up for quite a long time to do that.
By contrast, you could get up to about 2.5 per cent in interest from a bank savings account, if you don’t withdraw any money and meet other criteria – sometimes that includes depositing a certain amount each month, or having a certain amount invested.
You’ll have to consider your own circumstances to decide whether you think tying your money up for longer is worth the extra interest. You now need to give a month’s notice to break a term deposit.
Economists expect the official cash rate to remain on hold for some time, so there’s unlikely to be much change in short-term interest rates over the next 18 months. International pressure could push up longer-term rates, though.
Have questions about personal finance or consumer issues? Email susan.edmunds@stuff.co.nz