KiwiSaver Contribution Holidays: Pros and Cons

When money is tight, stopping KiwiSaver contributions can seem like an obvious way to increase your take-home pay. The contribution holiday option exists for exactly these situations. But understanding what you give up during a holiday helps you weigh the decision properly.

A contribution holiday is not free. The costs are real, even if they are not immediately visible in your bank account.

What Is A Contribution Holiday

A contribution holiday suspends your employee contributions and your employer's matching contributions. Both stop during the holiday period.

Holidays can last between three months and five years. You choose the duration when applying, and you can return to contributing before the holiday ends if you want.

During a holiday, your existing balance remains invested with your KiwiSaver provider. You are still a member; you are just not adding new contributions.

How To Apply

Apply through Inland Revenue, not your KiwiSaver provider. You can apply online through your myIR account or by submitting a paper form.

You need to have been contributing for at least 12 months before your first contribution holiday. After that, you can take additional holidays without the waiting period.

Approval is automatic if you meet the criteria. You do not need to explain your reasons or prove financial hardship.

What You Lose

The most obvious cost is missed employer contributions. Your employer's 3 percent contribution stops completely during a holiday, representing money you never receive.

On a $60,000 salary, 3 percent employer contribution is $1,800 per year. Over a five-year holiday, that is $9,000 in employer contributions forgone, before any investment returns.

You also lose the member tax credit during a holiday. If you were contributing enough to claim the full $260.72 annually, that is $1,300 over five years.

The Compound Effect

Missed contributions have consequences beyond their immediate value. Money not contributed does not earn investment returns for your remaining years until retirement.

A $1,800 annual contribution earning 6 percent over 30 years grows to approximately $5,000. Multiply that across years of contribution holiday and the long-term cost becomes substantial.

Early career contribution holidays are particularly expensive because those funds would have the longest time to compound. The same holiday closer to retirement costs less in compound returns.

When A Holiday Makes Sense

Genuine financial hardship is the clearest case for a contribution holiday. If choosing between KiwiSaver and essential expenses, your immediate needs must come first.

Short-term cash flow challenges, like saving for a deposit while also paying rent, may justify a temporary pause. The key is having a plan to resume contributing.

Career breaks, parental leave, or periods of reduced income can also warrant a holiday. The flexibility exists because life circumstances vary.

Alternatives To Consider

Before taking a holiday, consider reducing your contribution rate instead. Dropping from 8 percent to 3 percent maintains some saving and keeps employer contributions flowing.

You could also take a short holiday rather than the maximum five years. A three-month break for an immediate need is far less costly than a multi-year pause.

Budget review might find other expenses to reduce before stopping retirement savings. The short-term pain of maintaining contributions often outweighs the long-term cost of not saving.

Returning From Holiday

You can end a contribution holiday early at any time. Simply notify your employer to resume deductions, and the holiday ends automatically.

When your holiday period expires, contributions resume automatically unless you apply for a new holiday. Make sure you are prepared for the change in take-home pay.

Returning from holiday immediately restores employer contributions and your ability to claim the member tax credit. There is no waiting period or re-entry requirement.

Making The Decision

Calculate the true cost of a holiday before deciding. Add up missed employer contributions, lost member tax credits, and estimate compound returns foregone.

Compare this cost against the benefit of increased take-home pay. Sometimes the numbers support a holiday. Often they reveal how expensive a holiday really is.

If you do take a holiday, set a reminder to reassess regularly. Circumstances change, and returning to contributions as soon as possible minimises the long-term impact.