One fund manger is calling for tax breaks to boost New Zealand’s savings rate.
Milford Asset Management chief executive Troy Swann said savings was a politically sensitive issue. He said New Zealand’s household savings rate had been negative for the past several years, compared to a rate of 4.6% in Australia.
“As a matter of urgency, New Zealand needs to lift its savings rate. Before he became Finance Minister, Grant Robertson said he wanted to see KiwiSaver minimum contribution rates lifted from 3% to 4.%. The problem here is that many Kiwis are already very stretched financially and cannot afford to contribute more.
“A more effective way to encourage people to save more, Milford considers, would be to incentivise them to do it. For example, allowing people to make tax-deductible contributions, capped at a certain amount each year, to their KiwiSaver account. Whilst still allowing them to contribute over and above the annual cap on a non-tax-deductible basis.
“Currently the median New Zealander is earning about $49,000 p.a. yet anyone earning over $35,000 p.a. has no tax incentive to save more than 3% to their KiwiSaver account. Australia, the US, the UK and Canada all have stronger forms of tax incentives to encourage extra retirement savings – and all these countries have higher savings rates than New Zealand.”
He pointed to Australia’s tax system, where there are higher individual tax rates but the tax on super earnings is only 15%.
He said it was something that should be considered by the tax working group, chaired by Sir Michael Cullen, which is currently receiving submissions from people on the future of New Zealand’s tax system.
“What we’re effectively trying to do is encourage people to defer their current consumption for something that it will take them a long time to realise the benefit of. Tax incentives that tilt the benefit towards savings are something that need to be considered.”
Milford also wanted to see a move towards lifestages-style funds as default options and for a Government-sponsored study to be run of individual savings patterns and retirement requirements.
“Having a conservative fund as the KiwiSaver default fund is akin to giving our community poor investment advice,” Swann said.
“And in this case the poor advice is coming from the Government and it’s costing Kiwis hundreds of thousands of dollars in their retirements. A decade on from the start of KiwiSaver, it seems to have proved too hard for default providers to move their clients into growth funds. Clearly, action is now called for from the Government.
“If we take Australia as our yardstick, their Superannuation money is roughly 65% invested in equities. Which means not only are Australians getting wealthier through higher savings, they are also investing their savings in a much smarter way for maximum retirement gains.”