Tax treatment disadvantages KiwiSavers
New Zealand’s tax treatment of savings products means it is not a country for savers with a long-term view, says the Financial Services Council’s chief executive, Peter Neilson.
Monday, October 14th 2013, 10:20AM 
4 Comments
by Susan Edmunds
He spoke at the organisation’s Future of Super conference this morning and said the tax treatment of KiwiSaver was disadvantaging those who tried to put money away in the Government scheme over a long period of time.
Other countries promoted the view that savers who started young would reap the beneftis. But here, they could lose up to half their potential returns to tax, he said.
By contrast, highly-leveraged property investors would be left better off by the tax system over a long period.
His statement follows calls from the Retirement Commissioner last week to stop taxing the component of a savings account's interest that was only keeping pace with inflation.
Neilson said the New Zealand situation was an anomaly internationally.
Both Australia and Britain have incentives in the tax system for people to invest in superannuation and small penalties, such as capital gains tax, for rental property investment.
Neilson said: “For products that are subject to compounding returns, what seems to be low tax rates reduce savings by a much larger proportion. The longer you hold KiwiSaver, the higher the effective tax rate you pay. Saving a little for a long time cannot work in this country.”
He said the final KiwiSaver nest egg savers built up would usually be made up of about 10% initial contributions and 90% compound returns.
KiwiSavers need to also be aware that the impact of tax on compound returns in New Zealand increases considerably the amount you need to save each week to fund a comfortable retirement. Over 40 years, the impact of the effective tax rate on your investment reutrns reduces your retirement nest egg by more than 50%.”
His organisation is recommending a suite of changes that would better help New Zealanders prepare for retirement, including:
- Increasing the contribution rate by 1% a year until savers reach a total contribution of 7% of their incomes, including employer contributions.
- Moving default savings into higher-earning funds, depending on life stage.
- Offsetting that risk with insurance to guarantee a level of savings, estimated to cost about 30 basis points.
- Tax changes to level the playing field for KiwiSaver investments with other forms of retirement savings.
- Using the $740 million the Government spends on KiwiSaver incentives to fund a lower tax rate on savings.
Neilson said the high tax rate paid on KiwiSaver meant few people would want to bring their retirement savings back from Australia, where savers only pay 15%.
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Comments from our readers
Most would agree that property does have a tax advantage in NZ because of the lack of capital gains tax. The biggest beneficiaries of this are always going to be in areas where there is population growth and insufficient new home build starts.
Save $2000 a year of your own money + $500 from the govt for 30 years - return taxed @ say 25% - net return 5.25% = $182,000
Take the govt out
Take the IRD out
Make it simple
Withdrawals available anytime but if before age 60 tax must be paid
Much simpler than KiwiSaver
Employers can still put in on same basis as today
Michael Cullen would hate it as he designed KiwiSaver so low wage earners got real benefit and higher earners not much
Watch Kiwis get into it if it is tax free
Sorry Michael Littlewood, I know you won't agree with the previous paragraph, but dare I say it, I think you would be proved wrong
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