IN DEPTH GUIDE

KiwiSaver for Self Employed.

Are you  self-employed looking at using KiwiSaver as part of your retirement planning? This guide is for you.
Depending on your age, retirement may be a long way off, fast approaching or somewhere in between. Irrespective, it’s never too early or too late to work towards your savings goals, and KiwiSaver can be a powerful tool in your retirement toolbox. Read on for more..
In Depth Guide - Self Employed and KiwiSaver
Disclaimer

IMPORTANT: Please note that the content provided in this guide is of a general nature. It is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance. Feel free to get in touch if you have any questions, comments or concerns.

Welcome

Welcome

to our retirement guidfor self-employed Kiwis who are looking at using KiwiSaver as a part or all of their retirement planning progamme.

In this guide, we’ll talk about the key things that self-employed people need to consider when investing in KiwiSaver to save for retirement, buy your first home, or both. We’ll take a closer look at investment risk and the importance of diversification – and we’ll give you some practical things to think about and do.

Remember: wherever you’re at in life, there are two best times to start retirement planning –

  1. When you were 20 and
  2. Now.

So, let’s get started.

Who this guide is for

Who this guide is for

When it comes to financial needs, everyone is different: no size fits all. And your situation and needs are unique to you. Having said that there are some general principles that we can use to guide our financial decisions. This guide has been created to help Self-employed people understand that benefits of KiwiSaver and how it can be used to support or supplement your goals for home ownership and/or retirement.

Generally speaking, self-employed people tend to value their independence and are typically self-motivated. Your business is often much more than just a job – it’s your livelihood, a challenge, a passion. With so much to think about, it’s appropriate that your focus is set on the daily ins-and-outs of running your business, rather than longer-term goals like saving for retirement.

In fact, your business itself could help support your retirement goals: in the future, it may provide you an income or you might sell it as an asset.  But while there are a number of ways that self-employed people can leverage their business for retirement, relying on it as your primary source of retirement funds can pose some risks. If anything happened to the business, or the industry you’re involved in, would your retirement plans be in jeopardy?

KiwiSaver can help you diversify your long-term strategy, and even help to tick home ownership off the wish list. It can be (and, arguably, should be) part of your back-up plan.

Factors to consider

Factors to consider

Compared to most other investment vehicles, KiwiSaver is pretty straightforward and low maintenance. But as a self-employed person, there are a couple of extra things to think about.

So, here are some practical tips and factors to consider, to get the most out of the scheme now and over time.

KiwiSaver is not just for employees

KiwiSaver is not just for employees: self-employed people can also join KiwiSaver at any time by contacting the scheme provider of their choice directly.

The main difference is that, unlike employees, KiwiSaver contributions are not automatic for self-employed people who are not on the PAYE framework, and there’s no obligations for them to contribute. Furthermore, since you are your own employer, you won’t be receiving employer contributions on top of your own. But there are still many reasons why KiwiSaver makes good financial sense.

You can use KiwiSaver to ‘diversify’ and minimize risk

‘Don’t put all your eggs in one basket’ – it’s probably one of the most common sayings about risk. Broadly speaking – don’t put all of  your resources in one place.

When it comes to planning for retirement, relying entirely on your business is like having just one basket full of fragile and irreplaceable eggs. If something was to happen to your business outside of your control, your retirement plans could be significantly impacted. Having more than one ‘nest egg’ (e.g. KiwiSaver) will provide at least some cushion against the risk that your business does not cover your retirement needs.

You cannot make early withdrawals (with two exceptions)

Generally speaking, unless you’re buying your first home, you can’t withdraw your KiwiSaver money until the age of entitlement (currently 65). This removes the temptation to tap into your retirement savings for other goals or temporary financial issues (for example, if your business goes through a rough patch). There is an option to access your KiwiSaver if you’re in ‘significant financial hardship’, but keep in mind that criteria is quite strict to ensure your funds remain as untouched as much as possible – just what you need to ensure that your money stays invested until retirement.

The importance of regular contributions

If you’d like your KiwiSaver to give you a robust fund in retirement, or even help you buy your first home, then it’s important to make regular contributions to it.

Even small contributions, made regularly, can turn into a big difference when you retire. It’s the magic of compounding returns: on top of earning a return on your original investment, you also earn returns on your returns. Compounding essentially accelerates money growth – and the more you invest, the more ‘fuel’ you put into it.

However, many self-employed people only make sporadic lump-sum contributions, which means they often tend to invest the bare minimum, missing out on growth opportunities.

That’s why setting up a mechanism to automate contributions is a good idea.

One potential option to do this is by joining the PAYE framework: if your income is subject to PAYE deductions, you will be considered as ‘employee’ for the purpose of KiwiSaver. And just like employees, you will be able to choose your regular contribution rate of 3%, 4%, 6%, 8% or 10%.

IMPORTANT: Before signing up for PAYE for your own income, you should discuss it, and other options that may be more appropriate to your circumstances, with your accountant.

Alternatively, you can set up direct debit – the money will leave your bank account on a regular basis, and you won’t even have to think about it.

 

Understanding your risk profile

Understanding your risk profile

Risk and returns are an integral part of any investment journey, including KiwiSaver. That’s because markets go up and down all the time – it’s their nature. And the more volatile (and higher-risk) an investment is in the short term, the greater the likelihood of higher returns in the long run.

When it comes to KiwiSaver in particular, funds are characterised by five different levels of risk: from defensive (lowest-risk funds) through to conservative, balanced, growth, and aggressive (highest-risk funds).

On this note, as you know, there are essentially two ways to join KiwiSaver. You may either join as an employee (the employer might automatically enrol you into the scheme when you start a new job), or contact a KiwiSaver scheme and join directly if you’re self-employed or not working.

Either way, it’s important to understand your risk profile and actively choose a KiwiSaver that aligns with it, to avoid missing out on likely growth opportunities. In short:

  • If you have joined, or are thinking of joining now as a self-employed person, it’s crucial to ensure that the KiwiSaver fund you select aligns with your tolerance and capacity for investment risk. Over time, your risk profile may also change, so it’s important to review your KiwiSaver settings once every year or two.
  • If you were an employee when you joined but have never subsequently made an active choice of fund, you’re likely invested in a default (balanced) fund. In terms of risk, default funds used to be ‘defensive’, but since 1 December 2021 all default funds are ‘balanced’. And once again, a balanced fund may not be aligned with your risk profile, which means you might be missing out on potential growth.

Need help identifying your risk profile? Please don’t hesitate to contact us. In the meantime, here are some key points to get you started.

What does ‘risk profile’ mean?

In a nutshell, your risk profile is made up of your risk tolerance (how you personally feel about greater volatility and the balance of losses and gains), and your risk capacity (whether your KiwiSaver can withstand temporary declines in your balance, depending on your goals and time horizon). For more on this, download our comprehensive guide ‘What is risk and what’s your profile?’.

When do you need your KiwiSaver funds?

Do you plan to use your KiwiSaver funds to buy your first home, or are you using KiwiSaver just for retirement?

This question can help you determine your investment ‘time horizon’. The longer your time horizon, the greater your risk capacity: this means you can probably afford to take on relatively more risk with your KiwiSaver.

Here are some common scenarios:

  • You’re not expecting to use your KiwiSaver to buy your first home: that means your only goal is saving enough funds to live a comfortable retirement. Broadly speaking, unless your investment time horizon is shorter than 10 years, choosing the highest risk level you can afford – growth or aggressive – is usually a good idea.
  • You’re planning to withdraw from KiwiSaver (for a first home or retirement) five to ten years from now: in this case, you might want to choose a balanced fund – slightly less risk to protect your KiwiSaver money while also give it a solid opportunity to grow further.
  • You’re planning to withdraw from KiwiSaver (for a first home or retirement) within the next five years: a low-risk conservative fund may be for you. If buying a home is on the cards, you can also consider putting your retirement and first-home money into two separate funds: low-risk (and more protected) for your first home, and higher-risk for your retirement. Many providers now allow this option.
    How often should you check in?

    How often should I check in?

    Being a long-term investment tool, KiwiSaver is a relatively low-maintenance scheme. There will always be ups and downs along the way, as markets are volatile by nature. But if you’ve selected a fund that’s appropriate for your risk profile and you keep your gaze on the end goal, you can mostly ‘set it and forget it’.

    The big ‘KiwiSaver switch’ of 2020 was a key reminder of the importance of understanding risk and avoiding impulsive decisions. According to the Financial Markets Authority (FMA), during the height of Covid-19 market volatility, many KiwiSaver members switched to lower risk funds. What they couldn’t know (what no one could know) is that markets would bounce back relatively quickly: by that time, however, those investors had already crystallised their losses and missed out on the recovery.

    That’s why we recommend focusing on the long term and not checking in too often. If you’re not on PAYE, you may want to check at least once a year around mid-May or early June, to ensure that you’re maximising your annual Government contribution (we’ll expand on this powerful KiwiSaver feature later in this guide).

    Checking annually – just to ensure you’re on track – is also a good idea if retirement is less than 10 years away, or if you’re on PAYE and would like to use KiwiSaver to buy your first home.

    In all other instances (you’re on PAYE and retirement is more than 10 years away), you can reassess your KiwiSaver every couple of years, or following key life changes – like getting married, starting a new job, having a child, heading overseas etc.

    Time to review your KiwiSaver? Our ‘KiwiSaver Check up’ questionnaire (click here) can give you a sense of whether you need to make any changes, while also doing a reappraisal of your risk and time horizon. And if you have any questions, please get in touch: we can help you take a closer look at your risk profile, contribution rate, and savings projections.

    Facts and Figures

    Facts and Figures

    Just like any other long-term investment vehicle, the earlier you start contributing to KiwiSaver on a regular basis, the better: this is because your money has more time to grow exponentially, thanks to compounding returns, and also more time to weather big and small market downturns along the way.

    The bottom line is that, over a period of several years or decades, even small changes can snowball and add up.

    Cost of fees

    Much has been made about the cost of fees when it comes to KiwiSaver – and fees are an important consideration with all other factors being equal. However, they are only one of a number of factors that will influence the outcome of your KiwiSaver investment programme over the long run. You should also consider what additional benefits the fees are providing – eg access to robust financial advice has been shown to be a big determinant in long term investment outcomes. – some providers include advice provisions in their fee structures.

    Impact of volatility – $188,000

    The following example is for illustration purposes only, and based on someone (let’s call him John) earning $60,000 a year and contributing 6 per cent per annum from age 25 to age 65. $188,000 – this could be the difference in today’s dollars (inflation adjusted) between a conservative fund and an aggressive fund, when John hits 65.

    Impact of procrastination

    It may surprise you, but someone (let’s call them Jane) who starts contributing to KiwiSaver at age 25 and doesn’t contribute anything after age 35, by age 65 will usually do better than someone who started at age 35 and contributes at the same rate as Jane until 65 – thanks to the magic of compounding returns.

    Don’t stop

    Unless you are experiencing significant financial hardship, we recommend keeping your KiwiSaver contributions going, and avoiding withdrawing your funds until you retire (if you can).

    Key KiwiSaver Features

    Key KiwiSaver features

    Retirement may not necessarily be on your mind just now, but on its own or in combination with other financial tools, KiwiSaver can help you grow your wealth.

    So, here are some benefits of using the scheme as a self-employed.

    Annual Government contribution


    Every year, for each dollar you contribute to your KiwiSaver (excluding employer’s contributions), the Government adds an extra 50 cents to your account, up to a maximum of $521.43.* To get the maximum Government contribution, you need to contribute at least $1,042.86 in the year between 1 July and the following 30 June. All KiwiSaver members aged 18-65 are eligible.

    It’s easy to understand why this feature is so valuable: it’s like earning a 50 per cent return on the first thousand dollars you invest – every year. For example, if you contribute $400 in the year, you’ll get an extra $200 in your account. If you contribute $650, you’ll get $325, and so on.

    To get the most benefit, it makes sense to maximise your contribution. As we said, if you’re on PAYE and earning more than $35,000 per annum, it’s easier to contribute regularly and meet the target. But if you’re not on PAYE, checking in with your KiwiSaver annually is all-the-more important. Each year, in early June, you can assess how much you’ve contributed during the KiwiSaver year: if it’s less than $1,043, you can still manually top up your account to secure the maximum Government subsidy.

    First-home features

    Depending on your stage of life, you may be looking at buying your first home. There are essentially two ways to use KiwiSaver for your homeownership goals.

    Making a first-home withdrawal is one. If you’ve been in KiwiSaver for at least three years, you can withdraw almost all your KiwiSaver funds for your first home, except for $1,000. You must intend to live in the house, and the money cannot be used to buy an investment property. Some other conditions also apply.

    With house prices at their highest level in New Zealand’s history, it’s easy to understand why more and more Kiwis are taking advantage of this opportunity. However, keep in mind that an early withdrawal can impact your long-term retirement goals. It’s important to evaluate the pros and cons – something that we can assist you with.

    First-Home Grants are another ways to use KiwiSaver, this time without tapping into your retirement savings. If you’ve been making regular KiwiSaver contributions (at the minimum required amount) for three to five years, you may be eligible for a First Home grant of up to $10,000, depending on whether you buy a new-build or an existing home. And you can also join forces with other eligible KiwiSaver members.

    Having said that, there are some key eligibility criteria to meet, including maximum income limits for single and multiple buyers, deposit requirements, and region-specific house price caps. Get in touch if you’d like to learn more.

    * The government contribution in your first year of joining KiwiSaver is prorated from the time you join. e.g If you join KiwiSaver on 1st October, you would be eligible for 75% of the Government contribution for the year to 30th June the following year.

    What could you be thinking about?

    What could you be thinking about?

    Being your own boss is all about being independent, and more often than not, devising strategies to reach your goals and build up revenue requires your undivided attention. Through the whirlwind of decisions that need to be made day by day, it can be challenging to save for retirement – especially if you invest most of your income back into your business.

    Having said that, retirement planning is a crucial component of your financial picture. And KiwiSaver can be one of the many tools at your disposal, and a key part of your back-up plan. You don’t even need to contribute a lot to get started, if you start early and make regular contributions along the way.

    As a self-employed person, you have no obligations to commit to a set amount each week: you can make lump-sum payments through Inland Revenue or directly via your KiwiSaver provider of choice. At the bare minimum, we usually recommend self-employed people to put in at least $20 a week (or $1,043 each year, from 1 July and 30 June), to receive the full annual Government contribution of $521 a year.

    Being self-employed, you have free rein over the size and frequency of contributions. But it’s important to ensure that this flexibility doesn’t turn into a disadvantage in the long run, putting your long-term goals on the back burner.

     

    TIME FOR A RETIREMENT CHECK UP?

    How much you’re contributing, your fund type, your risk appetite and capacity, and more: use our handy Quiz to take a good look at your KiwiSaver settings and goals.

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    A quick KiwiSaver-question? We're here to help. Is it time to take a good look at your financial plan? We can help there too. From simple queries through to advice for retirement, investment, and financial planning, we welcome you to get in touch.

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