Call for KiwiSaver tax changes
Tax changes to KiwiSaver are needed to encourage New Zealanders to start saving enough for their retirements, an AFA has told the Tax Working Group.
Thursday, May 3rd 2018, 6:00AM 
5 Comments
by Susan Edmunds
Drew Hoffman, an authorised financial adviser at Newton Ross, said New Zealanders were saving too little in KiwiSaver - and the lack of tax incentives on the scheme could be to blame.
He said it compared unfavourably to other countries' structures. In the UK, contributions and fund growth are not taxed but distributions are. In the US, under the Roth option, contributions are taxed, growth is not, and distributions are not.
"Once an employee has contributed up to 3% of his or her salary, there is no incentive for him or her to contribute anymore under the KiwiSaver scheme. A contribution rate of 3% for most people is not going to result in a comfortable retirement,” Hoffman said.
“With the amount of New Zealand Superannuation likely to diminish because of population demographics, the New Zealand government needs to incentivise Kiwis to save more.”
He said the Roth option would be good choice for New Zealand.
“Income and growth on current amounts in KiwiSaver accounts would no longer be taxed and income and growth on additional contributions would not be taxed. I recommend that the limits on contributions be set at $15,000 per annum or 15%, whichever is lower, for employees under age 50. Employees aged 50 and over should have limits of $20,000 or 20%, whichever is lower, to encourage savings for those nearing retirement.”
He said the government was making money off KiwiSaver at the moment, even when the $521 tax credit for each member was taken into account.
“In the future, the amount made by the government on taxation of KiwiSaver will only increase under its current form. The New Zealand government needs to get serious about encouraging people to prepare adequately for retirement. In order to do that, it needs to give up some of its current revenue, otherwise it will have much larger problems on its hands in the future in attempting to fund New Zealand Superannuation.”
The government could drop the member tax credit.
He said employer contributions should also be increased to 5% and employees’ contributions to 7%, with the provision for employers to reduce employee pay to fund the match.
The public consultation period for the Tax Working Group generated 6700 submissions.
“I would like to thank the New Zealand public for taking part in the process and assure everyone that all submissions will be carefully considered,” said chairman Michael Cullen.
About 16,000 votes were received on the quick polls on the Tax Working Group website.
The unscientific polls revealed the majority of respondents thought the tax system needed major changes to be ready for the future.
The prospect of a capital gains tax topped the chart of important tax issues followed by funding retirement and protecting the environment.
| « Tough quarter for KiwiSaver | KiwiSaver rules for MPs - even if their scheme doesn't exist any more » |
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Comments from our readers
Drew mentioned that "He said the government was making money off KiwiSaver at the moment, even when the $521 tax credit for each member was taken into account."
But taking into account the tax on 3% of income and the tax on investment returns, I don't think it adds to $521
The advocates for tax breaks for retirement savings ignore several big research findings. Off the top of my head, they include
1. there is no evidence that NZers are currently not saving enough for retirement.
2. the standard savings rate analysis only looks at flows of current income saving; it ignores wealth accumulation by way of repayment of debt, capital appreciation on houses and stocks
3. what is the economic argument of favouring retirement savings for tax breaks over spending on fresh fruit and veges for kids, private education, private health care, personal life insurance or anything else for that matter
4. there is little evidence that tax breaks for retirement savings increases national savings; sure it increases the share of the tax advantaged channels, but this might just be at the expense of other forms of saving
5. increases in employer subsidies at least in the short run increases the total cost of employing; longer run, base pay increases might not be as large as they would have been
6. The studies on the future cost of NZ supershow that it peaks mid century as a % of GDP and then falls; the NZSuper Fund was designed to take a bit off that peak.
The people I hear most often calling for increased tax breaks for retirement savings are those who most clearly benefit from them, and who don't think they would pay.
Thanks for that. Good to hear that you don’t take any commissions or trails on KiwiSaver however making statements that KiwiSaver needs tax changes to encourage New Zealanders to save more with, apparently, no analysis plays into the hands of the dodgy characters so prevalent in this industry. As Murray points out there is no evidence that New Zealanders are not saving enough for retirement – KiwiSaver isn’t the only option and it certainly isn’t the cheapest option based on fees. A reasonable discussion would also look at the relative impact on the terminal sum of lower fees versus increased contributions either by the individual or through tax breaks. I have a model that will do that and when I get some time I will get on to it.
Regards
Brent
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I'm sure readers will be very interested.