Local Govt | National News Video | Parliament Headlines | Politics Headlines | Search

 


Plan to Make a Comfortable Retirement Affordable for NZers

EMBARGOED TO 9.15AM MONDAY OCTOBER 14 2013

Plan Released to Make a Comfortable Retirement Affordable for New Zealanders

The Financial Services Council has developed a plan that makes KiwiSaver fair, accessible and affordable for everyone so that all New Zealand employees can have a comfortable retirement with savings that enable them to buy a second pension to have an income, double NZ Super.

CEO, Peter Neilson says the evidence-based options, released today (October 14) at the Future of Super Conference hosted by the FSC, show that a comfortable retirement would be achievable and affordable if contribution rates to KiwiSaver progressively increased to 7% per annum.

The Council, whose members are entrusted with $80 billion in savings from 2 million New Zealanders, has based its package of options on independent consumer research, expert tax analysis and financial modelling.

The FSC plan seeks to:

- gradually increase the contribution rate by 1% a year, split with your employer, until you reach 7% so you can buy a second pension to provide a retirement income double NZ Super- that’s only 1% more if you are already putting aside 6% (3% from the employee and 3% from the employer) – and provide a new KiwiSaver 1% starter contribution rate to get people into the scheme

- keep NZ Super as is


To get the required KiwiSaver contribution rate down to 7% four things need to happen:

- move default KiwiSaver savings into higher earning funds depending on your life stage

- offset the additional risk with insurance to guarantee a level of savings at retirement

- level the tax playing field for KiwiSaver investments with other forms of retirement savings

- re-target the $740 million government spends on KiwiSaver incentives to fund the lower tax rates on savings and make the new policy fiscally neutral (Horizon Research 2013: 7.8% of KiwiSavers say they only put in the minimum $1024 contribution p.a. so they can get the $521 tax free credit)

And to get that to happen all parties represented in Parliament need to agree and commit to providing a retirement savings policy that:

- continues to support KiwiSaver to help New Zealand employees save for a comfortable retirement over their working lives

- progressively steps up KiwiSaver contributions and coverage

- does not put New Zealanders who save for retirement in KiwiSaver at a tax disadvantage compared with other savers

- lowers taxes on KiwiSaver fund earnings over time to level the playing field so KiwiSavers are not at a tax disadvantage.

Mr Neilson said the research shows people know they have to save if they want more than NZ Super, but they can’t do it alone.

“We want our opinion leaders and decision makers to get to grips with what is going to become an increasingly costly problem for the country with the faster than anticipated growth in the over 65s living longer, and the number of retirees who do not have adequate savings to live anything more than a meagre existence,” he said.

“We need a new resilient retirement income policy that will see all New Zealanders have a comfortable retirement – like our better off Australian neighbours can expect. We look forward to starting that conversation.”

FSC work shows that on the current policy settings people need to save 10% of their income every year over 40 years from age 25 and that amount escalates to 50% of annual income needing to be saved if you leave it till you are 55.

“That rate can be reduced to a 7% annual KiwiSaver contribution rate with sensible tax and investment policies,” Mr Neilson said.

While 2 million people have enrolled in KiwiSaver, close to half of them are not actively contributing and many of those who are saving are saving just 6% of their income – it is not enough, especially for those nearing retirement, and insufficient to buy a second pension to fund a comfortable retirement which our research says New Zealanders believe is an annual income double NZ Super.

”It will be no surprise that there is such a big shortfall. People are not saving anywhere near sufficient and are also miscalculating how much they need to save as their longevity increases but their savings do not. There is also the need to factor in the impact of very high effective tax rates on KiwiSaver savings and whether they are in the right fund for their life stage.”

Researchers tell us that of your final KiwiSaver nest egg, 10% come from your initial contributions and 90% from compound returns (interest on interest). KiwiSavers need to also be aware that the impact of tax on compound returns in New Zealand increases considerably the amount you need to save each week to fund a comfortable retirement. Over 40 years the impact of the effective tax rate on your investment returns reduces your retirement nest egg by more than 50%. (see Rule of 72 below)

For research, tax modelling, financial analysis and a media backgrounder please go to:

http://fsc.org.nz/SuperSizeRetirementIncome.html

Understanding Compound Returns and the Impact of Tax and Time:

APPLYING THE RULE OF 72 - IF YOU CAN DO THIS YOU ARE SMARTER THAN MOST NEW ZEALANDERS

Have you ever wondered if there is an easy way to calculate how long it takes to double your savings? There is a way, just divide the number 72 by the interest or growth rate. The rule of 72 provides a very good estimate of how compound returns (interest on interest) works.

It is less accurate once the interest or growth rate exceeds 20%, but if you are promised a 20% interest rate or growth rate it is probably a scam.

A simple illustration of how tax and time can eat into your potential savings

Suppose your Grandmother gives you a $1000 investment bond earning 6% a year tax free as a 17th birthday present for you to cash in when you are 65. How much will you have at 65 (using the rule of 72)?

72 ÷ 6% = 12 years

So your money doubles every 12 years at 6% interest tax free:

$1000 becomes $2000 in 12 years

$2000 becomes $4000 in 24 years

$4000 becomes $8000 in 36 years

$8000 becomes $16000 in 48 years

After 48 years your $1000 would have grown to $16,000 by the time you get to 65, assuming you kept reinvesting all the interest each year and paid no tax on the interest earnings. So $1000 of savings has produced a $16,000 nest egg at retirement.

Now……

Imagine instead of it being tax free you were taxed at 50 cents in the dollar on any interest you earned. That is a 50% tax rate. That means that rather than 6% interest each year you are earning just 3% interest after tax.

72 ÷ 3% = 24 years

So your money only doubles every 24 years at 3%

$1000 becomes $2000 in 24 years

$2000 becomes $4000 in 48 years

After 48 years your $1000 would have grown to only $4,000 when you get to 65 because of the impact of tax.

Ouch....

You can see the impact of the 50% tax rate on that initial $1000 investment, but what you can’t see is that the effective tax rate is actually 75% over 48 years

ENDS

© Scoop Media

 
 
 
 
 
Parliament Headlines | Politics Headlines | Regional Headlines

 

PARLIAMENT TODAY:

  • Week in Parliament 22-05-15
  • Saturday Sitting
  • House Rises At Midnight
  • Telco Levy Bill Passes
  • Telco Levy Bill Completes First Reading
  • Social Housing Bill Passes Under Urgency

  • TPPA: University Of Auckland Warns Of Negative TPP Impact

    The University of Auckland May 20, 2015 University of Auckland Warns of Negative TPP Impact With the Trans Pacific Partnership (TPP) negotiation drawing to a close, the University of Auckland has expressed serious concerns about its potential implications. ... More>>

    NZ Flag: Flag Referendum Gets Hit Hard In New Poll

    The latest Campbell Live text poll confirms it is time for the Prime Minister to listen to the public and shelve his flag referendum, says the New Zealand First Leader Rt Hon Winston Peters. More>>

    Gordon Campbell: The Government’s Belated Moves On Property Speculation

    Is it a property tax on capital gains or a capital gains tax on property? The Jesuitical distinctions in the government’s spin about its latest moves on property speculators are all about whether the government can claim that it jumped, or confess that it ... More>>

    Grant Robertson:
    Key Can’t Just Be Prime Minister For Parnell

    John Key must show New Zealanders in next week’s Budget that he is more than the Prime Minister for Parnell, and is also the Prime Minister for Pine Hill, Putararu and Palmerston North, Labour’s Finance spokesperson Grant Robertson says. In a ... More>>

    Labour Party: More Regional Jobs Go In Corrections Reshape

    News that 194 Corrections staff are to lose their jobs will have ramifications not only for them and their families but for the wider community, Labour’s Corrections spokesperson Kelvin Davis says. Prison units at Waikeria, Tongariro and Rimutaka ... More>>

    ALSO:

  • NZ First - Prison Job Losses to Send Money Offshore
  • TPPA: ‘Team Obama’ Regroups On Fast Track, Still Not Deliverable

    ‘After yesterday’s stinging and unexpected defeat for the Obama administration’s attempt to advance Fast Track legislation in the US Senate, Senate leaders have worked up a compromise they think will get them past this blockage’, according to Auckland ... More>>

    NZ Government: 5,500 More Doctors And Nurses In Our Hospitals

    Health Minister Jonathan Coleman says a record number of doctors and nurses are working in District Health Boards across the country. More>>

    Controller and Auditor General: Katherine Rich Conflict of Interest Decision

    We are writing to you about a matter that has been raised with us by members of the public. More>>

    ALSO:


    Budget 2015: Andrew Little On The 2015 Budget

    Speaking to the Chamber of Commerce, the Labour opposition leader attacked the government’s approach to economic issues facing New Zealand. He said they have been “more than reckless in their complacency” and “the next week’s budget will do nothing ... More>>

    Defence Force: NZDF Building Partner Capacity Mission Personnel In Iraq

    NZDF Building Partner Capacity Mission Personnel in Iraq The New Zealand Defence Force Building Partner Capacity training mission contingent is in place at Taji Military Complex in Iraq. The Chief of Defence Force Lieutenant General Tim Keating says the ... More>>

    PM Press Conference: ACC Levy Cuts Announced

    In a press conference this afternoon in Wellington, ACC Minister Nikki Kaye proposed $500 million worth of ACC levy cuts. More>>

    Quakes: New Process For Red Zone Crown Offers

    Canterbury Earthquake Recovery Minister Gerry Brownlee has announced a process to give everyone a say on the Crown offers to owners of vacant, commercial/industrial and uninsured properties in the Residential Red Zone. More>>

    ALSO:

    Gordon Campbell: On The Battle Obama Is Waging Over The TPP

    For the past two and a half years, this column has been arguing that the fate of the Trans Pacific Partnership (TPP) deal will hinge on whether US President Barack Obama can win Trade Promotion Authority (TPA) from Congress... Last week, the White House finally, finally unveiled a draft TPA Bill. More>>

    ALSO:


    Gordon Campbell: On lessons for Labour from the UK election
    If the polls were right – and the pollsters kept telling us how accurate they’d been in 2010, and even Nate Silver was getting the same results – there seemed no way that the British Labour Party could lose last Thursday’s British election. With Labour predicted to win around 270 seats and the Scottish National Party batting around 55-60 seats, Labour seemed to be home free. But…as we now know, things didn’t turn out that way. Labour ended up with 232 seats and the Conservatives swept back to power with an outright majority, after winning only a little more than a third ( 36.9%) of the votes cast.MORE >>
    Also.

  • NZ PM John Key - PM congratulates David Cameron after UK election
  • The Nation IV Transcript - Hack Attack author Nick Davies
  • Get More From Scoop

     

    LATEST HEADLINES

     
     
     
     
     
     
     
     
     
    Regional
    Search Scoop  
     
     
    Powered by Vodafone
    NZ independent news