Contributing to KiwiSaver helps you save for your future, but we get sometimes other things might take priority and you want a break.
Applying for a Savings Suspension (this used to be called a contributions holiday), which defaults to one year, might suit if you’re suffering from financial hardship, or you’re really sick.
There could be other reasons too that mean you can’t contribute to your KiwiSaver balance right now. But what are the downsides of a Savings Suspension?
You’ll miss out on free money
While you’re contributing, your employer also contributes 3 per cent and, provided you contribute enough, you’ll get an extra $521 from the government each year. When you take a holiday from KiwiSaver, you’ll be missing out on this money that helps grow your balance.
It’s easy to let it slip
If you apply for a Savings Suspension, you could forget about your KiwiSaver account. Or, you could get used to having the extra cash and not be motivated to start contributing again.
You might lose the discipline to regularly save
When your KiwiSaver contributions come automatically from your pay, you don’t have to think about it. You don’t need to set money aside – it automatically gets you in the habit of saving.
If you’re not contributing to KiwiSaver, what will happen to that money? If you have a valid reason for your Savings Suspension, the extra cash could be used to get you out of financial hardship. Or maybe you’re sick, so it’s not suitable to contribute to your KiwiSaver balance right now.
But are you just taking a break from KiwiSaver so you have a bit of extra cash? Think carefully before starting a Savings Suspension.
You’ll miss out on maximising returns
Not only will your KiwiSaver account miss out on money from you, your employer, and the government, you’ll also miss out on the chance to maximise returns. One way your KiwiSaver balance grows is through investment returns (where your money can make money in financial markets). The longer you are invested the more returns you could get, growing your balance so you get still more returns on those returns. This is called ‘compound interest’, which can supercharge your balance.
You might want to make up the difference later
When you start contributing again, there will be a difference you might want to make up, to get to the same place you would have been before you stopped contributing. Either you will have to contribute more money to make up the difference. Or you’ll have to be lucky with the markets – they might work in your favour. But you don’t want to depend too much on luck – it should be a bonus, not your whole strategy.
Could you reduce your contributions instead?
Instead of signing up for a Savings Suspension, maybe you could reduce your contributions instead. If you’re on a high contributions rate, say 8 or 10 per cent, reduce to 4 or 3 per cent if you can afford it. That way, you’ll have a bit of extra cash in your pocket, but you’ll still be growing your KiwiSaver balance.
What about doing voluntary repayments?
If you’re on a break from contributing, you can still contribute on an ad hoc basis. At the very least you should try to contribute at least NZ$1,042 every year, so you qualify for the government bonus of NZ$521.
Something to remember…
The benefits of contributing to your KiwiSaver balance far outweigh the benefits of not. But contributing is a personal decision, and it might not be right for you at this time. If you’re unsure or want to know more about your contribution options, call your KiwiSaver provider. They are there to help you and should provide all the information you need.
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Published November 2018, updated 15 April 2019
Story by Claire Connell, JUNO, and Paul Gregory, Pie Funds
Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. Before relying on it, we recommend you speak with a financial adviser. All content is correct at time of publication date.