BENEFITS

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21. What are the advantages for employers in offering Locked-in Schemes to employees?

In the current tight labour market, staff attraction and retention is of critical importance. Passing on the ESCT saving employers receive to employees, and enabling employees to access KiwiSaver equivalent member tax credit contributions from the Government, are tangible benefits employers can show when seeking to attract and/or retain staff.

An employee may elect to "sacrifice" an additional percentage of their base salary which the employer can then pay as additional employer contributions into the Locked-in Scheme. In this way, if an employee is then paying tax at a marginal rate of 38%, the employee can still benefit from the difference between this rate and the lower ESCT rate of 33%, through “salary sacrifice”.

22. What is a “salary sacrifice”?

This is where the employee chooses to “sacrifice” a percentage of their base salary or wages, which the employer can then pay as additional employer contributions into the Locked-in Scheme. This way the employee has the benefit of effectively paying less tax on gross income, while the employer does not have to pay more than the minimum compulsory employer contribution required. (See question 21.)

23. What are the benefits of the Locked-in Schemes?

• Locked-in Schemes offer members the same benefits as the Existing Schemes:
  • Government Guarantee; and
  • 4% minimum annual earnings rate. These benefits do not apply to KiwiSaver.
• Over and above this, Locked-in Schemes also offer:
  • Employer’s superannuation contribution tax exemption on employer contributions of 2% of the employee’s base salary. For employer contributions to be tax free, the employee must make matching locked-in contributions;
  • tax credits on employee contributions;
  • access to the first home deposit subsidy from Housing New Zealand. Note that there are eligibility conditions for the first home deposit subsidy (see question 29).

24. Do employer contributions to a Locked-in Scheme attract the same employer tax credits as KiwiSaver?

Until 1 April 2009, the Government provides employers with a matching tax credit up to a maximum of $20 per week ($1,042.86 a year), per employee, for employer contributions to a Locked-in Scheme. These are administered directly via Inland Revenue and the employer’s payroll (and are netted off against other tax liabilities). These tax credits can be used to meet the cost of the employer contribution and other PAYE liabilities. Employer tax credits ceased to apply from 1 April 2009.

25. Do employee contributions to a Locked-in Scheme attract the same member tax credits as KiwiSaver?

Yes, the Government provides employees with a tax credit contribution matching their contributions up to a maximum of $20 per week ($1,042.86 a year). This credit is paid into the Locked-in Scheme and forms part of the member’s locked-in contributions. Tax credits may only be withdrawn early in cases of serious illness. If you permanently emigrate, tax credits must be repaid to the IRD.

26. Are members’ Locked-in accounts credited with the $1,000 kick start from the Government in the same way as KiwiSaver?

No. The Locked-in Schemes are not eligible to receive the $1,000 kickstart.

27. Are members of a Locked-in Scheme able to divert payments from the Locked-in Scheme to their mortgage in the same way as some KiwiSaver schemes?

No. The Locked-in Schemes do not allow mortgage diversion. In any event, mortgage diversion through a KiwiSaver scheme has been closed to new participants as from 1 June 2009

28. Are members of the Locked-in Schemes eligible to withdraw funds to help pay for the deposit on their first home?

Provided you have been contributing to the Locked-in Scheme for at least three years, if you have never owned a home (or are in the same financial position as would be expected of a person who has never owned a home), you may be able to withdraw the balance in your Locked-in Scheme account to help pay for the deposit on your home. A number of conditions apply, for example the house must be intended as your principal place of residence.

29. Are members of the Locked-in Schemes eligible for a Government-provided first home subsidy?

If you have been contributing continuously to the Locked-in Scheme for at least three years, you may be eligible for a subsidy of up to $1000 for each year of Scheme membership (up to a maximum subsidy of $5000), to buy your first home (or subject to conditions a second or subsequent home if you are in the same financial position as would be expected of a person who has never owned a home). The eligibility criteria are set by Housing New Zealand and include household income and regional house price caps. The household income limits currently are that you must:

• have a gross household income of less than $100,000 a year if your household consists of one or two people; or
• have a gross household income of less than $140,000 a year if your household consists of three or more people.

30. Are members of the Locked-in Schemes eligible for the management fee subsidy currently available under KiwiSaver?

No. Note also that the management fee subsidy only applies under KiwiSaver until 1 April 2009.