Disappointment at No Tax Relief for KiwiSavers

15 May 2014

FOR IMMEDIATE RELEASE

Disappointment at No Tax Relief for KiwiSavers in Budget 2014

The Financial Services Council is disappointed that after the 2014 Budget, the Government will keep in place the world’s most punitive tax regime for superannuation savings, said the FSC CEO, Peter Neilson.

Someone saving for retirement over 40 years, on the average wage, in a KiwiSaver default fund loses half their retirement nest egg due to the impact of tax rates on compound returns (interest on interest). Any dollar paid in tax within a KiwiSaver fund is a dollar not reinvested to earn interest on interest for the balance of the 40 years of saving to 65. For a typical 40 year saver every $1 in contributions becomes $10 in their retirement nest egg in the absence of tax on your fund. The other $9 comes from the compound returns. In New Zealand you need to save $2 to get the same $10 in a retirement nest egg because of the impact of tax on your compound earnings (interest on interest).

Most countries have tax concessions for retirement savings. In New Zealand the effective tax rates on KiwiSaver funds are much higher than on other forms of retirement savings such as investing in rental property.

An almost fiscally neutral way of funding KiwiSaver fund tax on the basis suggested by the FSC (cutting the current KiwiSaver fund PIR tax rates from 28%, 17.5% and 10.5% to 15%, 8% and 4.3% respectively) is available, funded by removing the $521 annual Member Tax Credit.

Changing the three existing PIR tax rates does not require any significant changes to IRD systems. The decision not to act in this Budget on KiwiSaver fund tax rates will ensure that it will become an election issue. FSC members in coming weeks will be discussing how KiwiSavers might be advised of the punitive tax regime they currently face and options for reducing KiwiSaver fund tax rates to make KiwiSaver fairer and more affordable.

The FSC welcomes the announcement that another round of auto enrolment for those employees not already in KiwiSaver is being considered on the back of a return to a fiscal surplus.

A discussion document on auto enrolment is expected to be released after the election. Auto enrolment is a good step to increase enrolment in KiwiSaver but most New Zealanders will need KiwiSaver fund tax cuts to be able to save sufficient to fund a comfortable retirement at twice the level of NZ Super, currently $282 after tax for each person in a couple.

ENDS

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