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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.

Tags: KiwiSaver tax

« Tough quarter for KiwiSaverKiwiSaver rules for MPs - even if their scheme doesn't exist any more »

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Comments from our readers

On 3 May 2018 at 12:24 pm Brent Sheather said:
This is the same argument made by high cost providers like Milford. In my submission to the TWG I made the point that in Australia the finance industry appropriates a good proportion of the tax advantages for themselves by way of very high fees. The Royal Commission is illustrating that point. By far the best way of improving retirement outcomes for Kiwisavers is a cap on fees. Maybe Mr Hoffman can advise what Kiwisaver funds his firm recommends, whether any commission is payable and what fees his clients pay on balanced and growth portfolios. Perhaps he could also advise the impact on the terminal sum for a 30-year savings plan of a reduction in fees from the typical 250 basis points including transaction costs to 50 basis points?

I'm sure readers will be very interested.
On 3 May 2018 at 1:15 pm Drew Hoffman said:
Hi Brent, The focus of the article is that people need to save more for retirement and they need incentives to save enough to have a better retirement. We typically don’t provide advice on KiwiSaver products other than to advise that it is a good idea to be in KiwiSaver because of the employer match and the government tax credit. We don’t promote any particular KiwiSaver scheme. We are a completely independent firm and we don’t take any commissions or trails on KiwiSaver or any other products. We are very aware of the implications of higher cost products and let clients know that.

On 3 May 2018 at 5:08 pm TerenceTing said:
How does the government make money off Kiwisaver or atleast $521

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
On 3 May 2018 at 5:18 pm Murray Weatherston said:
NZ has run a TTE retirement savings tax system since the Douglas reforms of the mid 80s. The second T might have had a little shaved off it for earners over 48,000 under the PIE regime but its still basically big T.

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.
On 4 May 2018 at 7:45 am Brent Sheather said:
Hi Drew

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.


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