KiwiSaver

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 an Infometrics report detailing how retirement incomes for employees can be doubled while leaving the NZ Super pension in place.

Chief Executive Peter Neilson said MPs had 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 election campaign.

Neilson said the report showed that to fund a comfortable retirement at about two 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 were choosing the right KiwiSaver fu, 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 balanced 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.

Neilson said New Zealand had the most punitive tax regime for retirement saving 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 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. 

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.

Neilson said the analysis also showed that the effective tax rates with the proposed lower FSC tax rates were not only more progressive than the current ones but that the effective tax rate for the highest income earners (37.1%, balanced fund) were 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,” Neilson said. “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.”

Problems withdrawing funds from KiwiSaver are prompting complaints to dispute resolution service providers.

The Banking Ombudsman Scheme has had a 51% increase in KiwiSaver cases compared to last year and expects complaints to continue increasing as the value of KiwiSaver savings grows and participant banks take more of the market.

There were 59 KiwiSaver complaints to March 31, compared with 39 for the same period the previous financial year.

Banking Ombudsman Deborah Battell said: “The majority of complaints are about the inability to withdraw funds, especially on hardship grounds.”

Insurance and Savings Ombudsman Karen Stevens reported similar issues with KiwiSaver.

“Many people do not realise they cannot wiwthdraw their KiwiSaver savings early unless they meet strict criteria.”

The Insurance and Savings Ombudsman Scheme received over 40 queries and complaints last year from KiwiSaver members. “Most of our KiwiSaver queries are from people who want to withdraw their savings early and find that they can’t,” Stevens said.

“The point of KiwiSaver is to help people save for their retirement, so the ability to withdraw your KiwiSaver savings before the age of 65 is very limited.”

She said the criteria was strict in cases where people could access their money.

“For example, we had a recent complaint from someone who had applied to withdraw his KiwiSaver savings to help buy his first home. This was declined as the sale had been completed before his application was received. As he owned the house already, he did not meet the criteria for a home withdrawal.”

New Zealanders don’t agree with claims that they don’t have a savings problem, the Financial Services Council says.

Michael Littlewood, co-director of the Univeristy of Auckland’s Retirement Policy Research Centre, said in an interview with Marcus Lush on Radio Live that New Zealand does not have a savings problem.

But the FSC said that most New Zealanders did not agree with him.

FSC chief executive Peter Nielson said 41% of adults felt they needed to be compelled to save.

A survey conducted for the FSC showed 70% of adults support making KiwiSaver compulsory.

Just 12% oppose a compulsory savings scheme, 3% lean towards opposing it and 8% are neutral.

Neilson said New Zealanders overwhelmingly thought they were not saving enough for retirement and would not be able to live comfortably on just the pension.

Most thought they needed twice the current $282 a week that the pension would provide. But only 6% were contributing 10% or more to KiwiSaver.

“It’s abundantly clear that Kiwis want to lift retirement incomes, are prepared to save to do that through a compulsory KiwiSaver scheme – and more than 1.3 million actually say they need to be forced to do that, because they know they won’t get around to doing it themselves, “ he said.

“If they are presented with a package of policies which mean they can gradually start contributions at 0.5% a year each from employer and employee per year until they reach the minimum required under KiwiSaver, investments being defaulted into balanced funds, instead of conservative, and fairer taxes on savings, then they’re huge fans of compulsory KiwiSaver.”

Nielson said: “Kiwis are not silly: they know that a long-term policy and long-term savings are needed to build their wealth. They simply don’t believe experts who say they are saving enough and they won’t have a problem in the future. Already large numbers of people trying to live on NZ Super alone are struggling, especially those who must pay market rents.”

Small businesses and those on low incomes would be negatively affected by Labour’s proposal to introduce a variable contribution rate for compulsory KiwiSaver, one banking expert says.

The policy, part of an announcement by the party’s finance spokesman, David Parker, this week, called for the Reserve Bank to be given an additional tool:  Instead of relying solely on the official cash rate, the party proposes to give the Reserve Bank the ability to alter compulsory KiwiSaver contribution rates as a way to alter consumer behaviour and slow inflation.

Claire Matthews, of Massey University, said KiwiSaver contribution rates should increase, but not in the way Labour is proposing.

“The spectre of the government meddling with KiwiSaver is not welcome,” she says. “It’s the realisation of the fears of many Kiwis, especially those who have not signed up to the scheme.

“Using KiwiSaver as a form of monetary policy is really straying away from the purpose for which it was created.”

ANZ’s Cameron Bagrie agreed. He said if the Government was willing to give the Reserve Bank control of KiwiSaver accounts, it might as well hand it the Super Funds as well. “I can see a Tui billboard.”

BNZ chief economist Tony Alexander said the proposal ran counter to most investment strategy. “As the economy is booming and share prices rise, KiwiSaver contributions would increase and purchases of shares would increase, exacerbating upwards pressure on share prices. People would buy more overpriced shares at the top of the market. Then when the prices were falling, the falls would be exacerbated because KiwiSaver contributions would be reduced.”

Matthews said the compliance costs of changing contribution rates would be hard on small businesses.

“Each time the KiwiSaver contribution rate changes, businesses will need to update their payroll systems to deduct the appropriate amount requiring additional, non-productive compliance activities.”

Those on low incomes, or trying to save for things other than their retirement, would also be adversely affected.

“Even five dollars per week can be a significant sum for someone on a low income. And, as usual, the focus is on achieving lower rates for mortgage holders with no thought given to those with bank deposits earning lower interest income. I also question David Parker’s claim that lower interest rates would mean lower credit card rates. Credit card interest rates tend to be very inelastic.”