Tax breaks needed to boost savings: Milford
One fund manager is calling for tax breaks to boost New Zealand's savings rate.
Monday, March 19th 2018, 6:00AM 
7 Comments
by Susan Edmunds
Milford Asset Management chief executive Troy Swann said savings was a politically sensitive issue. He said New Zealand’s household savings rate had been negative for the past several years, compared to a rate of 4.6% in Australia.
“As a matter of urgency, New Zealand needs to lift its savings rate. Before he became Finance Minister, Grant Robertson said he wanted to see KiwiSaver minimum contribution rates lifted from 3% to 4.%. The problem here is that many Kiwis are already very stretched financially and cannot afford to contribute more.
“A more effective way to encourage people to save more, Milford considers, would be to incentivise them to do it. For example, allowing people to make tax-deductible contributions, capped at a certain amount each year, to their KiwiSaver account. Whilst still allowing them to contribute over and above the annual cap on a non-tax-deductible basis.
"Currently the median New Zealander is earning about $49,000 p.a. yet anyone earning over $35,000 p.a. has no tax incentive to save more than 3% to their KiwiSaver account. Australia, the US, the UK and Canada all have stronger forms of tax incentives to encourage extra retirement savings – and all these countries have higher savings rates than New Zealand.”
He pointed to Australia's tax system, where there are higher individual tax rates but the tax on super earnings is only 15%.
He said it was something that should be considered by the tax working group, chaired by Sir Michael Cullen, which is currently receiving submissions from people on the future of New Zealand's tax system.
“What we’re effectively trying to do is encourage people to defer their current consumption for something that it will take them a long time to realise the benefit of. Tax incentives that tilt the benefit towards savings are something that need to be considered.”
Milford also wanted to see a move towards lifestages-style funds as default options and for a Government-sponsored study to be run of individual savings patterns and retirement requirements.
“Having a conservative fund as the KiwiSaver default fund is akin to giving our community poor investment advice,” Swann said.
“And in this case the poor advice is coming from the Government and it’s costing Kiwis hundreds of thousands of dollars in their retirements. A decade on from the start of KiwiSaver, it seems to have proved too hard for default providers to move their clients into growth funds. Clearly, action is now called for from the Government.
“If we take Australia as our yardstick, their Superannuation money is roughly 65% invested in equities. Which means not only are Australians getting wealthier through higher savings, they are also investing their savings in a much smarter way for maximum retirement gains."
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Comments from our readers
Figure 21 in the Tax Working Group's background paper shows a 47.2% tax rate on KiwiSaver savings. Reducing that tax rate seems like a better place to start. A tax cut on savings would make a much bigger difference than modest tinkering to fees.
Incidentally anyone in the industry would know that the tax on PIE funds is nowhere near 47% and that is excluding the fact that capital gains are tax free. Simplifying things again the tax on a KiwiSaver PIE fund will be 28% on the income with no tax on capital gain. In a NZ equity context because of imputation credits there is basically no tax to pay i.e. 0%. For international stocks I calculate the tax rate on total returns as being around 30% depending on what you pay in management fees. These numbers look very different to the 47.2% figure don’t they?
By the way I think this is a very misleading graph and to be frank it looks like fake news. I imagine you are in the industry and you have obviously been misled in line with most of the population who don’t bother to read the fine print. Thanks for bringing it to my attention.
It also shows that tax rates are a lot higher than most people think because they forget that the inflation component of the return is being taxed.
They could have used say last year's returns rather than assume 5% nominal. But it would mean showing the tax rate on risk free bonds was about 100% while the tax rate on global shares was about 6%. Which may be true, but not very informative longer term.
To have a 30% tax rate on global shares with 2% inflation you need around a 7% nominal return after fees - I did not think you were so optimistic!
Your client invests into a PIE which invests into international equities. Which matters more to your client's overall return: the manager fees of 1% of FUM; or the tax rate tax of 1.4% of FUM (being 28% of 5% FDR)?
For a start I don't recommend PIE's which invest in international shares but running with your comparison the 1% fee is forever whereas FDR will be gone within 12 months (my view). Incidentally, here are the numbers for somebody investing in international equities via a KiwiSaver fund. Most uncompromised experts reckon that stock markets are priced to return 6% so if we take off the 2% average fee impost inclusive of trading costs then another 1.4% for tax you are left with 2.6%. So mum and dad get 2.6% and take all the risk, the tax department get 1.4% and take no risk and the fund management industry get 2%, again with no risk.
Regards
Brent
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It is also ironic that Milford would say that “conservative funds as a default is giving our community poor investment advice.” The really bad advice is the fact that the default providers impose fee structures on their members of around 15x higher than what the NZ Super Fund deems acceptable.
The best thing this government could do to “incentivise savings” is to put a fee cap on KiwiSaver and I am thinking a maximum of 50 basis points for growth funds would be a good place to start.