NZers being set on road to lower income retirements
7 May 2014
Embargoed until 6am, Thursday 8 May 2014
Most middle income New Zealanders being set on road to lower income retirements
Most middle income New Zealand employees are being sent down a road to a financially uncomfortable retirement, says the Financial Services Council (FSC).
It has this week sent all MPs a specially-commissioned Infometrics report detailing how retirement incomes for employees can be doubled – in ways New Zealanders will support and the country can afford - while leaving the NZ Super pension in place.
Financial Services Council Chief Executive Peter Neilson says his organisation has suggested a package of policies which will achieve this.
MPs have been told that
• unless KiwiSaver fund tax rates are cut and
• default investors are moved from conservative to balanced or growth KiwiSaver funds
most middle income employees will be unable to achieve a comfortable retirement.
This advice is based on a new Infometrics report commissioned by the FSC which has been sent to MPs prior to the Budget and the start of the General Election campaign.
Mr Neilson says the report clearly shows that to fund a comfortable retirement at about 2 times NZ Super alone (currently $282 a week after tax for each of a couple) the most important drivers for KiwiSaver members, after setting the right level of income to be saved are
• choosing the right KiwiSaver fund (conservative, balanced or growth), then the
• tax paid on returns earned on KiwiSaver investments, and lastly the level of fees paid to KiwiSaver providers.
Last year the Government decided not to have default KiwiSavers opt automatically into a balance or growth fund with the option to move later if that was their choice. Default providers now have to advise default KiwiSavers on where best to invest to achieve their desired retirement.
Mr Neilson says New Zealand currently has the most punitive tax regime for retirement saving that we have been able to find in the developed world.
“Someone on the average wage saving over 40 years will lose half of their retirement nest egg to the impact of tax,” he says.
“The international superannuation guru, Ezra, has estimated that if you did not pay tax on your retirement investment fund you would only need to save $1 for each $10 you received in retirement. This means $9 out of the $10 dollars come from the compound returns (the interest on interest) from your initial $1 of savings.
“In New Zealand you have to save $2 to get the same $10 of retirement earnings because our tax regime is cutting your retirement nest egg in half.
Last year the FSC published an earlier Infometrics report http://fsc.org.nz/site/fsc/files/SuperSize%20Conference%202013/Infometrics-Funding%20a%20Comfortable%20Retirement-19September-Final%20copy.pdf that outlined how we could cut the contributions to fund a comfortable retirement by moving default KiwiSavers from conservative to balanced or growth funds for higher earnings and from cutting KiwiSaver fund tax rates. The latest report examines those proposals in greater detail to address concerns that the proposed changes might be unfair to lower income KiwiSavers. That is cutting KiwiSaver fund (PIR) tax rates funded by the removal of the $521 annual Member Tax Credit paid into the accounts of those saving $1042 or more.
The analysis shows that the value of the reduced KiwiSaver tax rates over 40 years far exceeds the value of the $521 tax credit which is worth $28,000 over 40 years.
MPs have been told tax reform could drop contributions for someone on the average wage by $164,000 and the tax change boosts their nest egg by $288,000 over a 40 year working life.
Mr Neilson says the analysis also shows that the effective tax rates with the proposed lower FSC tax rates are not only more progressive than the current ones (the tax rates increase faster as the incomes of the KiwiSavers increase) but that the effective tax rate for the highest income earners (37.1%, balanced fund) are higher than the current highest marginal income tax rate of 33%.
“Middle and lower income New Zealanders deserve the comfortable retirement enjoyed by long serving politicians and public servants. That cannot happen unless the unfair taxation of KiwiSaver funds is addressed,” Mr Neilson says.
“Only politicians can fix that for us.
“Fair tax for KiwiSavers will be an election issue this year. It is one important element to stop us sending most employees on the road to a financially uncomfortable retirement .”
The key information from the new Infometrics report is on pages 4, 5, 7, 10, 12 and 13.
Comparison of Current and Proposed KiwiSaver Fund (PIR) Tax Rates
|Income Bands||Current PIR Rates||FSC Proposed PIR Rates*||Percentage Reduction|
|Up to $48,000||10.5%||4.3%||59%|
|$48,000 to $70,000||17.5%||8.0%||54%|
* This is one possible PIR tax rate structure that could be funded by removing $521 annual MTC while keeping the $1000 sign up incentive.
KiwiSaver in Conservative to Balanced Scenario E Saving over 40 years 25 to 65