If you're one of the 5% of Kiwis who are working for themselves, you might be wondering how KiwiSaver could work for you. As the gig economy grows, it's also essential these people that you protect your financial future, just the same as salaried employees.
Sadly, it's estimated that only about 36% of independent earners are contributing to their KiwiSaver accounts. While they don't benefit from the employer contributions, there are still some reasons why self-employed New Zealanders can benefit from KiwiSaver.
Why should I contribute to KiwiSaver?
KiwiSaver accounts can play an integral role in setting you up for retirement or helping you purchase your first home. Both are fundamental financial milestones in most Kiwis' lives. Being able to feel confident that you too can achieve those goals can give you a spring in your step as you enter your next gig.
For contractors, there are several benefits to KiwiSaver:
- It is a simple, low-cost investment product. By choosing the right fund, you can invest in an easy to understand low-cost fund; this will allow you to grow your nest egg faster than most other savings/investment products. KiwiSaver investment funds tend to offer lower fees than their non-KiwiSaver counterparts which mean more of your money is going towards investing rather than being deducted in costs.
- You can contribute tiny amounts. Unlike many other savings options, KiwiSaver allows you to contribute a minimal amount every week. You can invest as little as a few dollars a week if you want to. Most other ways of investing have transaction costs or minimum investment thresholds, which make it harder to invest regularly.
- You get free money. As a contractor, your employer will not be matching your 3% contributions, so there is not as much free money on the table as permanent employees. Though you can still get the annual Government contribution (up to an extra $521 per year), you just need to make an annual contribution of $1,042 to qualify.
The one big thing to remember about KiwiSaver is you can only withdraw your money in a select number of circumstances (First home purchase, when you turn 65 or when experiencing Financial Hardship). It can be both an advantage or a disadvantage depending on how you look at it. For some people, the lack of options is a blessing in disguise as it means you are unable to spend/invest their savings in a high-risk venture. We have all heard far too many times the story of the 50-year old that has "blown" their retirement savings on a property development or some other investment. KiwiSaver takes away this temptation as you cannot take the money out unless for specific circumstances.
How can I contribute to my KiwiSaver account?
As a contractor, you don't contribute via PAYE like everyone else. That means you will need to contribute via voluntary contributions. The key to making this as straightforward as possible is to make it very regular and automated — random lump sums can be heartbreaking and easy to talk yourself out of.
Hnry has set up a great tool where you can contribute to your KiwiSaver like a regular full-time employee.
If you have income that you can count on every month, then set up a recurring debit with as much as you want to invest — we would suggest at 6% of each payment, before tax. To make this as seamless as possible, try to set up the payment to go out as soon as you are paid. If it is a regular monthly invoice, just set up an AP, if it is a little less consistent, try to do it as soon as the cash arrives in your account.
When I was contracting, I would clear out my bank account every month with whatever was leftover and spread it across my different investment and KiwiSaver accounts.
Tax implications
As a contractor, we understand that tax is a big part of the equation. Unfortunately, KiwiSaver is not a mechanism to reduce or change your eventual tax bill. If you contribute via PAYE, the contribution is taxed at your marginal tax rate. If you make a voluntary contribution, then this is paid out of your post-tax income, which makes it effectively the same.
Self-employed work can be inconsistent — I know all about that. KiwiSaver is a chance to bring security to that equation. Something to fall back on at the end of the day when all is said and done. If you back yourself enough to go out on your own, then you should be backing your retirement, too.
Choose the right fund. Choose kōura.
