KiwiSaver

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.”

There is support for removing the annual $521 KiwiSaver member tax credit to fund lower tax rates for the scheme, the Financial Services Council says.

It has been lobbying for some time against what it says is preferential tax treatment for residential property investment compared to investment vehicles such as KiwiSaver.

One of the suggestions it has proposed is that the Government should reduce the tax levied on KiwiSaver accounts, and finance the move by removing the $521 tax credit currently paid to members who contribute at least twice that, in each year.

The FSC said the change would mean someone who earns an average income, who moved from a conservative to a balance fund, could cut his or her KiwiSaver contributions over 40 years by $164,000 and reduce the impact of tax on their KiwiSaver earnings by $288,000.

It commissioned Horizon Research to carry out a poll asking New Zealand adults: “If KiwiSaver were to become compulsory, the current tax credit would no longer be needed to encourage people to join.  The saving to the Government could be used to cut taxes on KiwiSaver investments to increase retirement incomes with lower contributions. How strongly would you support or oppose this?”

FSC chief executive Peter Neilson said more than 49% of KiwiSavers supported the idea and 11.5% opposed it.

“Even the 8% of KiwiSavers who only contribute just enough each year, $1042 to get the $521 annual tax credit, were more supportive (48.8%) than opposed (24.5%).”

He said: “The current effective tax rates on KiwiSaver funds are the highest we could find on retirement savings anywhere in the world compared to investments in rental property.  KiwiSavers see the long-term benefits from cutting KiwiSaver fund tax rates. When tax removes 54.7% of your retirement nest egg after 40 years of saving compared with only 7.9% on rental property, KiwiSavers know something needs to be done.”

Tax on KiwiSaver should be an election issue this year, the Financial Services Council says.

In comments prepared for the Retirement Policy Research Centre’s forum Retirement Income Policy: the future is now, 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.”

He said: “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.”

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,” 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.

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,” Neilson said. “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.”

The Co-operative Bank is to start distributing Fisher Funds’ KiwiSaver products even though rival bank TSB is a shareholder in the fund manager.

The Co-oeprative Bank chief executive Bruce McLachlan says KiwiSaver is now a core banking product that had to be added to its offering to customers.

After looking at the various offerings in the market Fisher Funds was selected for a number of reasons. One of the key areas it differentiated itself in the market was its abilities around distribution. Fisher Funds already has agreements with its shareholder TSB as well as the Association of Credit Unions. (Coincidentlly The Co-operative Bank recently accussed the association of trying to hi-jack its brand – story here).

“Fisher was the right partner for us,” he said. “It was an easy decision to select them.”

While it may saeem odd that the bank should do a deal like this with an organisation owned by a competitor McLachlan said not to read anything into it. “No, no, no. YOu can read absolutely nothing into it.”

He said the bank has relationships with other competitors including BNZ, Kiwibank and Westpac.

McLachlan said it is a function of a small market place, and the bank had to be realistic about options.

He also said the bank had “reasonable protection” if TSB makes changes in its ownership of Fisher Funds.

The Co-operative Bank has 132,000 customers and it will be active seeking to engage with them and getting them to take up its KiwiSaver offering. McLachlan says many people are in inappropriate funds for their risk profile and need to shift.

Since The Co-operative Bank doesn’t have any AFAs it will be working on a class-advice model and referring customers bank to Fisher Funds if they want personal advice.

The Co-operative Bank is paid a referral fee for all customers it signs up to Fisher Funds. McLachlan says the bank has “reasonably high expecations” on the number of its customers it can proactively get into its KiwiSaver offering.