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

#SaveCampbellLive : Mediaworks Delivered 104,000 Petition Signatures At TV3's Newton HQ
#PonyTailGate #TailGate Full Coverage

Pukeahu Park : ANZAC 100th Anniversary Dawn Service In Pictures

Roughly 18,000 people gathered this morning at Pukeahu Memorial Park for the Anzac day centenary. Anticipating the large turnout, patrons arrived as early as 4.30. It was virtually impossible to get near the Memorial after 5am. By 6, the crowds on Taranaki Street had stretched as far back as the Z Petrol station.

The screens erected around the park displayed the live events to those who had turned up. The heat generated by the huge number of people caused many to take a turn. Medics and ambulances were on hand for the fainting crowd members. Only twenty minutes into the ceremony, one medic said they had already dealt with 15 to 20 spells. More>>

 

PARLIAMENT TODAY:

War: What’s To Commemorate?

Gordon Campbell in Werewolf: Is there anything that can be validly commemorated on this 100th anniversary of Gallipoli? Beyond, that is, a fleeting sense of empathy with the thousands of soldiers killed or wounded on April 25 1915 and in the months thereafter, until the whole thing was finally called off in December 1915. More>>

MORE IN WEREWOLF:

ALSO:

Peter Ellis Case: Minister Declines Request For Commission Of Inquiry

Justice Minister Amy Adams has declined a request from supporters of Peter Ellis for a Commission of Inquiry on the basis that an inquiry cannot be used to determine the liability of any person. 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:

Greens: Govt Breaks Free Doctors Visit Promise To Kids

Documents obtained by the Green Party show that the Government decided to fund only 90 percent of doctors’ visits for children suffering from an injury in an attempt trim the cost of the so-called “free” visits. More>>

ALSO:

Other Wars: Extension Of NZDF Commitment In Afghanistan

The New Zealand Defence Force’s commitment of mentors and support staff to the Afghan National Army Officer Academy in Afghanistan has been extended out to December 2016, Defence Minister Gerry Brownlee says. More>>

PM's Press Conference: Auckland Property Prices Increasing "Too Rapidly"

John Key accepted that Auckland property prices 'are going up too rapidly” in a press conference held today in Wellington, however he said that this is not anything new. More>>

ALSO:

Press Conference: ANZAC PMs Concerned About ISIL Bringing The War Home

Prime Minister Key and Prime Minister Abbott spoke of the bond formed between Australia and New Zealand in the “baptism of fire” of Gallipoli. Abbott stated that New Zealand and Australia’s values and interests are linked, and this is reflected in the joint operation in Iraq which will begin shortly. More>>

ALSO:

Get More From Scoop

 

LATEST HEADLINES

 
 
 
 
 
 
 
 
 
Regional
Search Scoop  
 
 
Powered by Vodafone
NZ independent news