Law changes offer KiwiSaver flexibility

A new bill hopes to address low contribution rates in the retirement savings scheme.

The Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill has been introduced to Parliament, introducing enhancements to KiwiSaver in line with the Retirement Commissioner’s December 2016 review of retirement income policy.

Among the changes it would introduce is a move to allow people over 65 to join the scheme, to give them access to KiwiSaver as a provider of low-cost managed funds through retirement.

It would also remove the lock-in period that requires people over 65 to stay in for five years before they withdraw their money.

Both changes would come into force next July if the bill is passed.

At the moment people over 65 cannot join KiwiSaver or move to a new scheme, although they can continue to contribute to their accounts if they are already a member.

People who want to withdraw their money have to wait – a rule that was designed to stop them joining simply for the $1000 kickstart, which has since been removed.

Other changes, which the bill would bring into force in April, include new contribution rates of 6% and 1%, reducing the maximum contributions holiday that people can take from the scheme to one year, and renaming that holiday a “savings suspension”.

In its regulatory impact assessment, Inland Revenue said the changes should address low contribution rates and long contribution holidays being taken by KiwiSaver members.

In the year ended June 31, 2017, 131,710 members were on a contributions holiday. Almost 85% were for five years.

“Stopping contributions for five years has a significant impact on members’ savings, and also means members generally do not receive the member tax credit or employer contributions during this period,” Inland Revenue said.

“The purpose of the contributions holiday is to ensure members can take a break from making contributions when they are not in a financial position to do so. However, having a default five year contributions holiday period is likely to be longer than necessary for many members (whose financial position is likely to improve in the interim period).”

It said the new contribution rates should help savings rates and give more flexibility for members.

“The additional 6% rate would also address the gap between the current 4% and 8% contribution rates, which the Review indicated many members think is too large. This view is supported by the fact that 24% of members contribute at the 4% rate, but only 9% of members contribute at the 8% rate.”