KiwiSaver – security and choice Questions and answers

Specified Superannuation Contribution Withholding Tax (SSCWT) Exemption

Why is the SSCWT exemption being introduced for KiwiSaver?
A targeted SSCWT exemption represents a moderate and prudent means for firms to help their employees reach their retirement savings goals. The exemption also demonstrates that the government has listened to feedback provided by stakeholders during consultation on the KiwiSaver Bill.

What is SSCWT?
SSCWT stands for Specified Superannuation Contribution Withholding Tax. It is a tax applied on any monetary contribution to a superannuation fund that is paid by the employer for the employee’s benefit.

How does SSCWT affect me?
Employer contributions made to a superannuation fund are subject to tax, in particular Specified Superannuation Contribution Withholding Tax (SSCWT). This differs from employee superannuation contributions, which are normally subject to personal marginal tax rates (i.e. PAYE).

How will the SSCWT exemption work in practice?
Inland Revenue will be developing guidance for the SSCWT exemption. Employers and payroll companies will be advised of how the SSCWT exemption will work in practice in due course.

Why won’t the SSCWT exemption apply to non-KiwiSaver schemes?
The SSCWT exemption, like the $1000 government start-up contribution, will be a positive feature of KiwiSaver schemes. Other (non-KiwiSaver) superannuation schemes including those exempted from automatic enrolment provisions will have their own features to encourage membership.

Why wasn’t the SSCWT exemption included initially in the KiwiSaver Bill?
The SSCWT exemption is a response to feedback provided by stakeholders during consultation on the KiwiSaver Bill. It is also a matter that relates to tax policy rather than the design of KiwiSaver.

What is the estimated fiscal cost of the SSCWT exemption?
In 2007/08 the SSCWT exemption is expected to cost around $35 million in foregone revenue, increasing to $104 million in 2008/09 and $162 million in 2011/12.

Won’t the SSCWT tax exemption just favour those people on higher incomes who can already afford to save more for retirement anyway?
No. The SCCWT exemption is capped to the lesser of the employee’s contribution or 4% of the employee’s salary or wages, which forms part of the normal savings requirement under KiwiSaver.

Why will the SSCWT exemption be capped?

The cap on the SSCWT exemption is a prudent measure intended to prevent excessive salary sacrifice arrangements being entered into for the purpose of reducing a person’s tax
liability rather than saving. It reduces the risk of abuse and also aligns with the basic savings requirements for KiwiSaver. In addition, the cap will limit the SSCWT exemption’s fiscal cost.

Won’t the SSCWT tax exemption encourage “salary sacrifice”?
The exemption may lead to salary sacrifice arrangements to a degree, but the cap will help ensure that aggressive salary sacrifice arrangements do not occur.

Won’t this encourage employees and unions to increase pressure on employers to contribute to KiwiSaver?
Some employers, employees and unions may wish to discuss the option of employer KiwiSaver contributions as part of their normal negotiations over remuneration and work conditions. It should be noted that employer contributions will not be compulsory under the KiwiSaver scheme.

1 July 2007 introduction date

Why has the implementation date changed from 1 April 2007 to 1 July 2007?
This will ease the time pressure and help ensure implementation will be as effective and efficient as possible for all involved. Many will have to make decisions on employer contributions, preferred scheme providers, possible exemptions or conversions of existing superannuation schemes, and the establishment of appropriate information systems to ensure they will be able to comply with KiwiSaver requirements and IRD system requirements. These preparations can take some time to finalise. The Christmas / New Year break further tightens the preparation period.

Will delaying the implementation date by 3 months provide enough preparation time for KiwiSaver scheme providers, employers and government agencies?
Extending the KiwiSaver start date by three months to 1 July 2007 gives KiwiSaver scheme providers, employers and government agencies sufficient preparation time to help ensure that implementation will go smoothly.

Does this date change suggest the government has rushed getting KiwiSaver into law?
The date change demonstrates the government’s responsiveness to feedback provided by stakeholders during consultation on the KiwiSaver Bill and its commitment to ensure the implementation of KiwiSaver goes smoothly for all involved.

Has the date been changed to ensure government agencies are organised enough to make KiwiSaver work?
No. government agencies would have been able to meet the original 1 April 2007 implementation date, but the changed date will allow more time for everyone to get ready.

Doesn’t shifting the date from 1 April to 1 July make things more complex for employers? Employers have to make payroll changes such as ACC levy rates on 1 April, and now they’ll have to make payroll changes for KiwiSaver on 1 July.
Inland Revenue will work towards bundling all the Inland Revenue changes, including KiwiSaver, into one specification for payroll companies and employers.

Contribution rates

Will employer contributions count towards the 4% and 8% contribution rates?
Yes. Employer contributions can comprise part or even all of the 4% or 8% rates. For example, an employee might contribute 2% and their employer would contribute the other 2% to make up the 4% rate.

It provides flexibility for employers in the range of remuneration options they can offer employees, and also provides an incentive to join KiwiSaver for employees that would otherwise struggle to save 4% on their own.

Why isn’t there a 2% contribution rate to encourage low income earners to save? Lots of people cannot afford to save 4% of their income, and their employers may not offer KiwiSaver contributions.
While a 2% minimum contribution rate might encourage more people to join KiwiSaver, there would be significant downsides to introducing this lower rate. For example:

- A savings rate of 2% (combined with New Zealand Superannuation) would be insufficient to provide a comfortable replacement income in retirement for a large number of New Zealanders.
- There would be a greater likelihood of a large number of small KiwiSaver account balances. This would create higher overhead costs for KiwiSaver scheme providers, which would in turn drive up the fees providers charge.

Why isn’t there more flexibility in the contribution rates (e.g. 5% or 6%)?
There would be significant downsides to offering more flexibility in KiwiSaver contribution rates. For example:
- It would inevitably impose greater compliance costs on employers, who would need to calculate a range of contribution rates when working on payrolls
- It would create added complexity for employees deciding whether or not to save through KiwiSaver
The KiwiSaver Bill allows additional contribution rates to made and this is something that future governments could consider once KiwiSaver has bedded down.

Why not have a specific dollar amount that people have to contribute, rather than a 4% or 8% rate?
Using a dollar amount would have two significant disadvantages:
- The amount of savings under a percentage gradually rises as income rises, whereas a dollar amount would not. People may only infrequently look at raising this amount, meaning savings are likely to be lower.
- If the dollar amount were set at a low level (e.g. 4% at $30,000, or $23 a week), this same dollar amount would be only 2% of income at $60,000. This rate of savings is likely to be far too low to provide a comfortable replacement income in retirement.

Proposed enrolment process changes

What changes have been made to the period when new employees can opt out of KiwiSaver?
New employees will be able to opt out of KiwiSaver from the end of week 2 after starting their job, until the end of week 8. The originally proposed opt-out period was between the beginning of week 2 and the end of week 6.

Why has the opt-out period been changed?
The opt-out period has been changed to allow employers to report to Inland Revenue only once a month, and therefore reduce compliance costs. Because IRD won’t be advised of new employees until later, a longer opt-out period was needed. The new opt-out period also gives employees more time to consider whether or not to join KiwiSaver and to seek advice from a financial adviser if desired.

When will KiwiSaver contributions start being deducted from an employee’s pay?
For employees who are automatically enrolled in KiwiSaver, contributions will be deducted from their first pay after starting their new job. This is a change from the original proposal to start deducting KiwiSaver contributions after an employee had been in their new job 11 weeks.

Why will KiwiSaver contributions be deducted from the first payday when the employee might decide to opt out of KiwiSaver?
Having a KiwiSaver contribution deducted from at least one payday will allow new employees to see and assess the effects of contributing to KiwiSaver. Deductions from the first payday also make it less likely that new employees will “miss the money” that they will be saving for their retirement. There is also likely to be less confusion for employees if deductions are made from the first pay instead of their take-home pay changing after 11 weeks.

What happens to the KiwiSaver contributions deducted from an employee’s pay if they choose to opt out of KiwiSaver?
The money will be refunded.

How long will people have to wait to get their money back once they opt out of KiwiSaver?
This will depend on when Inland Revenue receives an employee’s KiwiSaver contribution from the employer, and when the employee decides to opt out of KiwiSaver. Refunds will be provided as quickly as possible. Furthermore, an employer will be able to refund contributions if the employee opts-out via his or her employer.

Mortgage Diversion

What is mortgage diversion?
Mortgage diversion means part of a person’s KiwiSaver contribution can go towards paying off the mortgage on their home. The rest of the contribution goes into their KiwiSaver account.

Why is mortgage diversion being offered?
KiwiSaver will encourage New Zealanders to save for their retirement through asset accumulation. This includes both financial assets (through KiwiSaver savings) and a home. Mortgage diversion, where offered by KiwiSaver scheme providers and mortgage providers, will allow KiwiSaver members to put away money for their retirement while also helping them pay off the home in which they live.

It will not be compulsory for KiwiSaver scheme providers or mortgage providers to offer mortgage diversion.

How will mortgage diversion work in practice?

- Mortgage diversion will be available after a KiwiSaver scheme member has made 12 months of contributions (consistent with the period before one can apply for a contributions holiday), as long as their KiwiSaver scheme offers mortgage diversion as one of its features.
- Mortgage diversion is limited to a saver’s own residence (e.g. “the family home”). It does not cover secondary properties (e.g. investment properties, holiday homes, etc).

- The diverted amount will be capped at no more than half the standard KiwiSaver contribution (so 2% [i.e. half of 4%] or 4% [i.e. half of 8%]). Key points to note include:
o Any employer contributions will not be diverted (so are saved).
o The diverted portion will be set at a fixed dollar amount, which may be periodically reset to reflect wage/salary increases or to bring the diverted portion up to the maximum allowable limit (allowing faster mortgage repayments).

- Mortgage diversion will apply for the life of the mortgage. However, once the mortgage is repaid, then the entire KiwiSaver contribution will automatically go into that person’s KiwiSaver account.
- KiwiSaver scheme providers will be responsible for paying the diverted amount to the person’s mortgage by automatic payment. The employer will forward an employee’s full KiwiSaver contribution to IRD, who forward this to the provider, who is then responsible for splitting the saved and diverted amount.

- Mortgage diversion will be available for “new” mortgages (i.e. post joining KiwiSaver) and “existing” mortgages (i.e. pre-dating a decision to join KiwiSaver).

Will all KiwiSaver scheme providers offer mortgage diversion?
It will not be compulsory for KiwiSaver scheme providers or mortgage providers to offer mortgage diversion. People who wish to have mortgage diversion will need to check with KiwiSaver scheme providers and their mortgage provider to see if they offer it.

Why will mortgage diversion be limited to paying only for my residence? Why can’t it be used to pay for other properties such as an investment property, a holiday home, or a house I’ve bought for my children?
KiwiSaver's primary purpose is to encourage a long-term savings habit for those who realistically could save more for their retirement but find it difficult to do so. KiwiSaver recognises that paying off a family home is a form of savings, with research suggesting that those who have a freehold home have a much better standard of living in retirement compared to those who do not.

Why will the diverted amount for mortgage repayment be capped at no more than half of my KiwiSaver contribution?

The intention behind mortgage diversion is that, where offered by KiwiSaver scheme providers, it allows KiwiSaver members to put away money for their retirement while also helping them pay off the home in which they live. If savers want to make a higher payment on a mortgage then they can either do so directly with their mortgage provider, or alternatively, take a contributions holiday and put all their KiwiSaver contribution directly on their mortgage.

Instead of offering mortgage diversion, why not allow a minimum KiwiSaver contribution of 2% so that people on lower incomes can afford to save for retirement and pay off their mortgage at the same time?
While a 2% minimum contribution rate might encourage more people to join KiwiSaver, there would be significant downsides to introducing this lower rate. For example:

- A savings rate of 2% (combined with New Zealand Superannuation) would be insufficient to provide a comfortable replacement income in retirement for a large number of New Zealanders.
- There would be a greater likelihood of a large number of small KiwiSaver account balances. This would create higher overhead costs for KiwiSaver scheme providers, which would in turn drive up the fees providers charge.

While some KiwiSaver members using mortgage diversion will effectively have a 2% savings rate over the life of their mortgage, this will revert to 4% (i.e. the full KiwiSaver contribution) once their mortgage is repaid.

Why wasn’t mortgage diversion part of the KiwiSaver Bill from the start?
Initial discussions with unions, retirement groups and mortgage providers indicated limited interest in mortgage diversion. However, the matter was raised in submissions on the KiwiSaver Bill and the government decided mortgage diversion would be a valuable addition to KiwiSaver.

ENDS

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