Budget 2011: More for regulation; more bonds; KiwiSaver cuts
Cuts to KiwiSaver, but swag of new bonds and a boost to financial sector regulation are the main measures in Budget 2011 for the financial services industry.
Thursday, May 19th 2011, 2:20PM 
1 Comment
by Rob Hosking
As signalled in advance, Finance Minister Bill English has kept the $1000 kick-start to KiwiSaver but the tax $1040 tax credit is halved and the employer's contribution will now be taxed.
The halving of the tax credit takes effect from 1 June: the taxing of employer contributions from 1 April next year.
Minimum contributions will be increased form 2% to 3% and compulsory employer contributions will rise by the same amount from 1 April 2013.
The government has not implemented any of the recommendations by the Savings working group to improve savings but Mr English said the government is still considering those options.
These included taxiing only inflation-adjusted returns on savings, and/or a lower tax rate for those returns.
The issues "are complex and should not be rushed," English said today.
Also under consideration - as advised by the group - is the issuance of a set of diversified, share market-listed passive debt and equity vehicles.
English also announced a set a new Earthquake Kiwi Bond for Christchurch
The new Financial Markets Authority gets a $2.5 million litigation fund - more than double the fund of the old Securities Commission.
Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.
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Someone earning $150,000 and contributing 2% of income to KiwiSaver is currently getting (from their employer & government) $1.30 for every $1 they put in.
That's a retune of 130% p.a.!
From 1 July they will only get $0.81 for every $1 they contribute, a reduction in return of 49% (130% - 81%).
But where else can you get a virtually guaranteed return of 81% p.a.?
For someone earning $50,000 p.a., you currently get $2 for every $1 you invest into KiwiSaver - a 200% return.
From 1 July that will reduce to $1.20 for every $1 you put in.
The budget changes reduce your investment return by 81% (200% - 120%).
I worked these sums out very quickly in my head so they are only approximate.
What these numbers show are: -
1) Yes, the budget changes have made a significant reduction in the incentives (and attractiveness) of KiwiSaver as an investment vehicle for your retirement; and
2) KiwiSaver is still the best lowest risk investment in New Zealand. Where else can you get a return of 81% - 120% each and every year?
For people like Lionel (see the 1st comment above), although it is extremely frustrating that the govt has made changes to KiwiSaver every year since its inception, by staying out of it, you miss out on the incentives that were there from the start, and those that still remain, and the only person losing out of it is you.