You’ll likely have heard words like Member Tax Credit and default fund floating around recently – but what do these terms actually mean? We’ve put together some of the most common KiwiSaver jargon to help you understand just what it’s all about!
Contribution – The money that is put into your KiwiSaver fund to invest. This can be from you, your employer or the government.
Member contribution – Quite simply, this is what you are contributing to your KiwiSaver account.
Employer contribution – This is the amount (after tax) that your employer contributes to your KiwiSaver account if you are employed. Your employer pays a minimum of 3% before tax.
Member tax credit (MTC) – This is what the government contributes to your KiwiSaver each year. While you’re contributing and eligible, the government puts in 50 cents for every dollar that you contribute up to $521 each year. To receive this top up, you need to put in at least $1042 over the course of the year.
Fund – A fund is a pool of money from many people that a fund manager invests. Each KiwiSaver scheme has a number of funds within it to choose from. There are also different types of funds, including conservative, balanced, growth, and aggressive.
Default fund – A fund for KiwiSaver members who haven’t chosen which KiwiSaver scheme they’d like to be a part of. Default funds are typically conservative and low cost. To make the most of your KiwiSaver, default funds should only be used as a temporary solution until you’ve chosen the fund that’s best for you and your situation.
Savings suspension – Previously called a contributions holiday, this temporary stop to your KiwiSaver contributions is now called a suspension. You can suspend your KiwiSaver contributions for 3 months to a year if you’ve been contributing for at least 12 months. If you need to extend this period, you’ll need to reapply again for a savings suspension. Stopping your contributions means that you also won’t receive your employer or government contributions.
Growth assets – These are usually shares or property and they’re called growth assets because they have more potential to grow in value over time than income assets. These do often involve more risk and will likely have greater ups and downs in value.
Income assets – Income assets are typically cash or bonds. These kinds of investments receive a regular amount of interest and generally have fewer ups and downs in value than growth assets and involve less risk. They do tend to have lower returns over the long term however.
Portfolio investment entity (PIE) – A PIE is a scheme or fund that pays tax on its returns based on your Prescribed Investor Rate (see below). Almost every KiwiSaver scheme is a PIE.
Prescribed investor rate (PIR) – This is the rate at which your returns are taxed when you are in a KiwiSaver scheme that is a PIE (see above). Depending on your circumstances and your taxable income, your PIR could be 10.5%, 17.5% or 28%. It’s important to check that you are on the correct rate to avoid being taxed by default at the highest rate of 28%.
Still have questions? Get in touch today and we’ll be happy to talk you through it!