Should You Take a KiwiSaver Contribution Holiday?

You're looking at your pay slip and doing the mental maths. If you paused your KiwiSaver contributions for a year, that'd be an extra few hundred dollars in your pocket each month. The car needs new tyres. The power bill just jumped. Maybe just a temporary break?

It's a thought that crosses many Kiwis' minds, especially when budgets are stretched. According to Sorted, thousands of New Zealanders take contribution holidays each year. But here's what most people don't realize: that "break" can cost you tens of thousands of dollars in retirement. Let's dig into whether it's actually the right move for you.

First, let's clarify what a contribution holiday actually means. When you take a KiwiSaver contribution holiday, you're not just pausing your own contributions. Here's what stops:

• Your contributions: Whatever percentage you've been contributing (3%, 4%, 6%, 8%, or 10% of your gross pay) stops coming out of your paycheck
• Your employer's contributions: Your employer is only required to match your contributions up to 3% when you're actively contributing. Stop contributing, and they stop too
• The government's annual boost: You'll likely miss out on the full $521.43 government contribution unless you make voluntary payments

What continues? Your existing KiwiSaver balance keeps growing (or shrinking) based on investment returns. Your money doesn't disappear. It just stops growing from new contributions.

You can apply for a contribution holiday once you've been a KiwiSaver member for 12 months. It lasts between three months and one year, and you can apply directly through your provider. After June 2019, the rules changed, according to Inland Revenue, making the process simpler but the consequences the same.

Here's where things get sobering. Let's say you earn $60,000 per year and you're contributing 3% (the minimum). That's $1,800 per year, or $150 per month.

During your contribution holiday, you'd save that $1,800 over the year. Feels good, right? But here's what you're actually giving up:

• Your $1,800 contribution
• Your employer's $1,800 match (3% of your salary)
• The government's $521.43 (assuming you were on track to get the full amount)

That's $4,121.43 in total that won't go into your KiwiSaver account that year. You saved $1,800 in take-home pay, but the actual cost to your retirement savings is more than double that.

Now here's where compound growth enters the picture. Let's say you're 45 years old and you take a one-year contribution holiday. That $4,121.43 you didn't contribute has 20 years to grow before you retire at 65.

Assuming a modest 5% annual return (a reasonable long-term average for a balanced fund), that $4,121.43 would have grown to approximately $10,940 by the time you retire. Take a contribution holiday at 35? That same amount could grow to nearly $17,800 over 30 years.

That's the real cost. You get $1,800 today, but it costs you around $11,000 to $18,000 in retirement, depending on your age.

Okay, so the numbers are confronting. But does that mean you should never take a contribution holiday? Not necessarily. Life isn't always about the optimal financial decision on paper. Some situations where a break might be worth considering:

Genuine Financial Hardship
If you're facing redundancy, unexpected medical expenses, or you're struggling to pay for essentials like food and housing, a contribution holiday might provide necessary breathing room. Your immediate financial stability has to come first. Just know what you're trading off.

You're Between Jobs
If you're unemployed or self-employed and not earning salary or wages, you're not required to contribute anyway. But if you're tempting or doing casual work, you might want to formally pause contributions to avoid the confusion of contributions starting and stopping.

You're Saving for a First Home Deposit
This is a tricky one. You can already withdraw your KiwiSaver for a first home (except the $1,000 kick-start and government contributions). Some people pause contributions to boost their cash savings for a deposit faster. The trade-off? You're losing your employer's 3% match during that time, which is effectively a 3% pay cut. It might make more sense to keep contributing and withdraw those contributions later when you buy.

You're Paying Off High-Interest Debt
If you're carrying credit card debt at 20%+ interest, the guaranteed "return" from paying that off faster might outweigh the uncertain returns from KiwiSaver. But here's the thing: you're still losing your employer's 3% match. Consider whether reducing your contribution rate to 3% (rather than stopping completely) makes more sense.

Before you pause completely, consider these options that might give you some financial relief without the full cost:

Reduce Your Contribution Rate
If you're currently contributing more than 3%, consider dropping down to the minimum 3%. You'll free up some cash while still getting your employer's full match and staying on track for the government contribution. If you're on 6%, dropping to 3% would free up 3% of your pay without losing any employer money.

Review Your Budget
This sounds obvious, but sometimes there's fat to trim elsewhere. Could you reduce subscriptions, negotiate better rates on insurance or power, or find small savings that add up? Even $50-$100 per month can make a difference without touching your retirement savings.

Access Financial Hardship Support
If you're genuinely struggling, you might qualify for early withdrawal from KiwiSaver under significant financial hardship provisions. This is different from a contribution holiday. You'd be accessing your existing balance. It's a serious step with its own consequences, but it might be better than stopping contributions while keeping money locked away. Check with government guidance on eligibility.

Increase Your Income
Easier said than done, but sometimes the answer isn't reducing savings but finding ways to earn more. Could you ask for a raise, pick up a side gig temporarily, or sell items you no longer need?

Here's something that doesn't show up in compound growth calculators: the psychological cost of taking a break. Research on retirement savings behaviour consistently shows that breaks tend to extend. You tell yourself it's just for a year, but then the year ends and you're used to the extra cash in your paycheck. Restarting contributions feels like taking a pay cut.

Your one-year break becomes two years. Then three. Before you know it, you've been out of KiwiSaver for half a decade, and you've missed out on tens of thousands in employer contributions and government money alone.

There's also the "out of sight, out of mind" effect. When you're actively contributing, you're psychologically invested in your retirement planning. You check your balance occasionally. You think about your future. Take a break, and retirement planning can drift to the back of your mind, competing with more immediate concerns.

If you're seriously considering a contribution holiday, here are some questions to discuss with a financial adviser or think through carefully:

• Have you explored all other options for freeing up cash in your budget?
• Could you reduce your contribution rate instead of stopping completely?
• How long would you realistically need the break for?
• What's your plan for restarting contributions?
• Are you prepared to miss out on your employer's 3% match during this time?
• Could you make voluntary contributions to still get some of the government's annual payment?
• What's the actual financial crisis you're trying to solve, and is there government support available instead?

The key is to be honest with yourself about whether this is genuine necessity or convenience. If you're cutting back on KiwiSaver to afford a holiday or a new car, that's probably not the right trade-off. If you're struggling to pay rent and buy groceries, that's a different situation entirely.

If you've weighed everything and decided a contribution holiday is necessary, here's how to minimize the damage:

Set a Firm End Date
Don't make it open-ended. Decide exactly when you'll restart contributions and put a reminder in your calendar for one month before that date.

Consider Voluntary Contributions
Even if you can't maintain regular payroll contributions, could you make occasional voluntary payments? Contributing just $1,042.86 over the year would qualify you for the full $521.43 government contribution, a 50% instant return. You can make voluntary contributions directly to your KiwiSaver provider.

Use the Time Wisely
If you're taking a break to tackle debt or build an emergency fund, make sure that's actually what the money goes toward. Set up an automatic transfer to a separate savings account for the amount you're "saving" from KiwiSaver. Otherwise, lifestyle creep will absorb it and you'll have nothing to show for your break.

Check Your Fund Type
While you're on a contribution holiday, your existing balance is still invested and working for you. Make sure you're in an appropriate fund type for your situation and time until retirement. If you're unsure, this might be a good time to review your settings.

Document Your Restart Plan
Write down when and how you'll restart. What needs to happen financially for you to resume contributions? Having clear criteria helps prevent the break from becoming permanent.

Disclaimer: This article is general information only and does not constitute personalised financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz.