In this election year the parties need to say how they will reduce the unfair over-taxation of KiwiSaver funds that prevents most New Zealand employees from achieving a comfortable retirement.
In comments prepared for the Retirement Policy Research Centre’s forum Retirement Income Policy: the future is now, Financial Services Council (FSC) Chief Executive Peter Neilson said: “Only 8% of New Zealanders think they will be comfortable in retirement on the $282 a week after tax being paid by NZ Super. Most people will need two times NZ Super to be comfortable in retirement. Saving to fund a second pension on current policy settings requires most New Zealanders to save more than 10% of their pre-tax income, a big ask for many also paying off a student loan and/or trying to buy a home”.
“For a typical person saving for retirement, just 10% of their retirement earnings comes from the initial contributions and a massive 90% from compound returns – the interest earned on interest on those initial savings. How we tax those compounding returns is therefore crucial in determining how many of us are going to be comfortable in retirement”.
Mr Neilson said New Zealand now has the world’s “most punitive” tax regime for retirement savings when compared with investments in rental housing.
“Someone paying 33% income tax will see over half of their KiwiSaver income (54.7%) go, due to the impact of taxation over 40 years.
“If the same person invested in rental property their effective tax rate would be only 7.9% if the property was geared up by 80%. If that period of ownership dropped down to only 10 years the rental investor would receive a tax credit, a payment from the IRD effectively a subsidy for investing in rental property. We can’t all be rental property investors,” Mr Neilson said.
“Many people struggle to save for a deposit for the house they live in let alone saving to buy a second home to rent out. Every rental property needs a tenant so at best only half the population can use that savings plan to fund their comfortable retirement.
A practical and fairer policy would be to reduce the KiwiSaver fund tax rates so savers are on a more even tax playing field with rental property investors.
The FSC has suggested cutting the current KiwiSaver fund tax rates of 28%, 17.5% and 10.5% to 15%, 8% and 4.3% respectively, with most of the cost being made up by abolishing the annual $521 KiwiSaver member tax credit.
$288,000 benefit from lowering tax on savings interest:
These proposed changes would mean someone on an average income, if they moved from a conservative to a balanced fund, could cut their KiwiSaver contributions over 40 years by $164,000 and reduce the impact of tax on their KiwiSaver earnings by $288,000.
At a practical level this means a person on an average income would have to save $16 a day rather than $27 (63% less) to achieve a comfortable retirement income.
“Regardless of whether KiwiSaver is universal (compulsory) or voluntary, the over-taxation of KiwiSaver funds has to be addressed,” Mr Neilson says. “Leaders of all parties should say if they support or oppose introducing fair taxes on savings. Fairer taxes will have a huge impact on the future incomes of New Zealanders when they retire.”
