KiwiSaver: Bridging the parental leave gap
A lot changes when you go on parental leave, but did you know how having a child affects your KiwiSaver as a primary carer? Here’s how to make sure you can reduce the impact of taking parental leave on your retirement savings.
KiwiSaver is a no-fuss way to invest in your future, with the added benefit of free contribution from the government every year.
It can be a win-win. But it’s not a flawless system when it comes to parental leave. A few little tricks can help you get the best out of your investment, but first, here’s the reality check.
In New Zealand, the average KiwiSaver balance for men is 25% higher than that for women - up 5% since 2022. That equates to about $6,352. As we approach retirement age, the gender gap grows even wider (MJW KiwiSaver Demographic Report).
Average KiwiSaver Balance by Gender
Source: Te Ara Ahunga Ora Retirement Commission and Melville Jessup Weaver 2023.
In a nutshell, this is because women are more negatively impacted by gender and ethnic pay gaps, spend more time out of paid work and are employed in part-time roles more than men.
It’s that second point that I want to double-click on because the impact of taking parental leave on your KiwiSaver can be a triple financial whammy:
By default, KiwiSaver contributions are not deducted from Government parental leave payments
Your employer also stops their contributions (unless their parental leave policy states otherwise)
And without these contributions, you may not qualify for the KiwiSaver government contribution known as the Member Tax Credit.
Frankly, systematic change is required from the government, employers and KiwiSaver providers to make KiwiSaver more equitable. In the meantime, we’ve outlined the actions you can take as primary caregivers to minimise the impact of parental leave on your retirement savings.
Also, if you are planning to use your KiwiSaver to buy your first home, then check the Kāinga Ora website to find out if taking a break will affect your eligibility.
Action 1: Maximise your Member Tax Credits
For every $1 you put into KiwiSaver between 1 July to 30 June each year, the government contributes $0.50 (that’s right, free money!). This is capped at $521.42, which means you need to put in $1,042.86 of your own money to get it. This is known as the Member Tax Credit.
The government doesn’t care whether you invest $21 every week or $1,042.86 in a lump sum, so you can make these contributions in a way that suits you - as long as you do it before 30th June each year.
But, you’ve got to be in to win - and you’ve got to contribute. Roughly 1.2 million people who belong to KiwiSaver haven’t made any contributions in the past year (Financial Markets Authority). That’s 40% of those enrolled!
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To receive the annual KiwiSaver government contribution, you must:
Be a member of a KiwiSaver scheme
Be 18 or older
Not yet eligible to make retirement withdrawals (i.e. under 65 years old)
Reside mainly in New Zealand (there are exceptions for employees of state services and some charities)
Contributed to your KiwiSaver account during the year
If you’re unsure, chat with your KiwiSaver scheme provider or the IRD.
What you can do now:
Set yourself a reminder for the 1st of March, repeating annually. When you get the reminder, check your KiwiSaver contributions for the year via MyIR (on the homepage, scroll to “KiwiSaver member” and click “Contributions Summary”). If you haven’t contributed $1,042.86 since 1 July the previous year, top it up to receive the full matching government contribution.
Another way to make this happen when you’re on parental leave is to set up a direct debit to your KiwiSaver provider of $21 a week. This way, your KiwiSaver contributions will happen automatically, and you’ll have contributed $1,042.86 by 30 June to receive the full matching of $521.42 from the government. Also, include your KiwiSaver contributions in any family budgeting you do - after all, there’s no reason your retirement savings should take a hit but your partner’s doesn’t just because you’re raising a human.
Action 2: Contribute more when you’re earning
You might consider increasing your contributions before you go on parental leave or when you return to work. The longer your funds are in KiwiSaver, the better your chances of a higher balance at retirement (thanks to compounding returns). So, when it comes to increasing your contributions, our guidance is generally the earlier, the better and the higher, the better (although there’s a caveat to that - see FAQ below).
What you can do now:
Your KiwiSaver contribution rate can be set to 3%, 4%, 6%, 8% or 10% of your pay. By default, it’s 3%.
You can change your contribution rate once every 3 months, unless your employer agrees to a shorter timeframe.
The IRD has guidance on how to change your contribution rate.
Action 3: Contribute to your KiwiSaver on parental leave
It can be tough to contribute to your KiwiSaver when money is tight. But if you think you can make it work during your parental leave, your long-term savings will be better for it.
From 1 July 2024, the New Zealand government started paying the equivalent of matching KiwiSaver ‘employer contributions’ on paid parental leave provided you also contribute.
Keep in mind that even if you receive the maximum paid parental amount from the government of $754.87 per week for 26 weeks, you may still miss out on the full Member Tax Credit. That’s because total KiwiSaver contributions from the Government paid parental leave at the default 3% rate would amount to $589 over that period, below the $1,042.86 threshold to maximise the Member Tax Credits.
What can you do now:
You can contribute to your KiwiSaver while on parental leave by:
Electing to have KiwiSaver contributions deducted from your parental leave payments when you complete your IRD application (or later in myIR if you’re already getting paid parental leave payments.)
Making your voluntary contributions to your KiwiSaver at any time. Contact your KiwiSaver provider to find out how to do this.
Action 4: Check if your credit card reward points can be converted into KiwiSaver contributions
Some credit card issuers in New Zealand allow you to convert your reward points into KiwiSaver contributions. This means you can save for retirement through your existing everyday spending - this is particularly helpful if you’re on a reduced income during parental leave.
What you can do now:
Typically, your KiwiSaver and your credit card must be with the same provider to convert the points. For example, Westpac offers credit cards that enable the account holder to exchange points for contributions to their Westpac KiwiSaver Scheme account. BNZ and ASB have similar arrangements. Chat with your credit card issuer or KiwiSaver provider to find out more.
KiwiSaver parental leave FAQs
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This is basically a trade-off between the ease of KiwiSaver’s set-and-forget method and having access to your funds.
KiwiSaver has a great behavioural benefit. It’s taken out of every paycheck by your employer without you having to do a thing. This set-and-forget approach is proven to be one of the most powerful ways to save. The hassle of setting up another fund and deploying funds each month is sometimes enough friction to stop people from actioning it, so in this respect, increasing your KiwiSaver contribution rate is easier.
If you think you might want access to your money it’s important to remember you can only withdraw your Kiwisaver when you are 65 years old (except if you fall into hardship, emigrate or in a handful of exceptional circumstances). Most KiwiSaver providers have a fund that is similar, if not identical, to their KiwiSaver fund but that you can withdraw from at any time.
And there’s one final financial point to consider: once you’ve contributed enough to get your employer's contribution (i.e. if you contribute 3%, your employer matches it by at least 3%) and the government contribution, there’s no financial benefit to adding more to your KiwiSaver fund.
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No. The income tax you pay depends on how much you earn and your KiwiSaver contribution rate doesn’t affect this. Just keep in mind that increasing your KiwiSaver contribution rate will reduce your take-home pay since more of your after-tax earnings are redirected from your bank account to your KiwiSaver fund.
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Since you’re already at the maximum, you’ll have to invest any additional funds in a non-KiwiSaver fund. Many KiwiSaver providers have a non-KiwiSaver fund that is similar, if not identical, to their KiwiSaver fund, but you may like to do some research and look further afield for your next investment opportunity.
Crayon’s Financial Baby Prep Program includes interactive planning tools to help you and your partner estimate the impact of parental leave on your KiwiSaver. Ask your employer if they offer the program.
Now for the important legal part: Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. The information we provide is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as at 12 July 2023.
Stephanie Pow
Founder & CEO of Crayon
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