KiwiSaver

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.

 

There are calls for a law change to provide clarity on what happens to a KiwiSaver account when someone is declared bankrupt.

The High Court recently ruled that bankrupts’ existing savings in a KiwiSaver scheme are available to be distributed by the Official Assignee to creditors, but only after the KiwiSaver member qualifies to withdraw the money – usually at age 65.

And in doing so, it created almost as many questions as it answered.

The case went to court after the Official Assignee requested the trustee of a KiwiSaver scheme release the funds of two bankrupts under the significant hardship provisions.

One of the men had debts of $26,254 and a KiwiSaver balance of $11,860.46. The other had debts of $9,583 and a balance of $10,805.98.

The Official Assignee argued that bankruptcy was inevitably the result of significant financial hardship and so would be a qualifying event for early withdrawal.

But the Court said the applications had to be decided on an individual basis.  It said the first man had become significantly better off upon bankruptcy because he no longer had to pay his debts. Even if he used his KiwiSaver account to pay off some of the debts, he would still be bankrupt so his situation would not be improved.

But the other would be able to clear his debts and could have his bankruptcy annulled. The Court suggested that might be enough to satisfy the financial hardship criteria.

Emma Dale, of Chapman Tripp, said:  “The case doesn’t take this any further. The court has left it up in the air for trustees to decide whether it will alleviate hardship.”

She said the case did not address what happened to the returns, fees and losses of the ringfenced KiwiSaver account between the time the person was declared bankrupt and when the money could be accessed, and created a situation where there were two separate sub-accounts within a scheme, one holding money for the Official Assignee and the other holding the investment the person made  after they were released from bankruptcy.

There were arguments for and against making KiwiSaver money available to creditors, she said. On one hand, it was specifically retirement savings but on the other, people might use their KiwiSaver accounts to stop creditors getting money. “It calls out for legal clarification either way.”

The Law Retirement KiwiSaver Scheme (LRKS) which is managed by Diversified Wealth Management closed to new members on April 1.

The scheme, for legal professionals, has two funds, with just over $5 million in funds under management and 382 members.

Orginally Diversified was the adviser to the scheme but took over managing it around 18 months ago. Director Vicki Watson said various options were being considered for the scheme’s future and no firm decisions had been made.

She said the increasing regulatory burden of running a KiwiSaver scheme had made LRKS uneconomic to run. Previously she thought critical mass was around $25 million funds under management, but now it was more likely to be around $100 million. Watson says this is likely to increase as new licencing requirements are introduced.

“The compliance costs have become too great for a small fund to survive,” she said.

The Law Retirement Balanced fund has $3.3 million in FUM and 206 members according to its quarterly disclosure statement for the three months to December 31. The average return of the fund was 1.54% annually since March 2009.

The Dynamic Fund has $2.24 million in FUM and 176 members, and an annual average return of 1.15%.