Monday 14th October 2013 1 Comment
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Taxes on KiwiSaver returns and low compulsory levels of contributions are holding back New Zealanders from achieving a comfortable retirement, according to a lobby group for the country's fund managers and insurers.
At a conference on superannuation in Auckland, the Financial Services Council, whose members manage more than $80 billion in savings for about two million New Zealanders, unveiled a series of options to boost pension incomes as it looks to pressure a new political consensus to deal with the nation's ageing population. The lobby wants the government to dump the government subsidy on KiwiSaver in exchange for a lower tax rate on investment returns to let members derive greater benefits from compound interest.
The FSC also supports a gradual increase in the contribution rate to 7 percent at a rate of 1 percentage point per year, split between employees and employers, and introducing a life-stages approach for default funds where younger members have a greater weighting to riskier assets.
"People are not saving anywhere near sufficient and are also miscalculating how much they need to save as their longevity increases but their savings do not," FSC chief executive Peter Neilson said in a statement. "There is also the need to factor in the impact of very high effective tax rates on KiwiSaver savings and whether they are in the right fund for their life stage."
The FSC's plan comes after Retirement Commissioner Diane Maxwell last week unveiled a raft of draft recommendations to the government to address the ballooning cost of superannuation, such as linking the age of eligibility to life expectancy and indexing increases in the universal pension to consumer prices and wages, rather than wages alone.
The lobby group wants the tax on KiwiSaver returns cut by about half, which would bring the scheme in line with the tax treatment on property. About a tenth of a final KiwiSaver's balance comes from contributions, meaning the current level of tax on investment gains takes about half the returns from the 90 percent contributed by compounding returns over a 40-year period.
What the FSC ended up advocating was fiscally neutral for the government if it ditches the annual credit on KiwiSaver accounts, but wouldn't eliminate the tax bias in favour of investing in rental property, according to research commissioned by the lobby group.
The paper by former PwC tax partner Paul Mersi and former Inland Revenue Department deputy commissioner Robin Oliver recommended a flat KiwiSaver tax rate of close to 1 percent to achieve the same after-tax return in rental property with 80 percent gearing for a 20 year period before it was sold.
"A much lower tax rate for investments in financial instruments or KiwiSaver-type schemes, as proposed in this paper, would reduce the disincentive effect and encourage more people to save for their retirement from an earlier stage of life," the paper said. "This is critical to ensure that New Zealand builds a more solid economy for the future and that people have a comfortable standard of living in their retirement years."
A rising pension bill has been an ongoing bugbear for the Treasury, which has been warning about the rising cost of the universal scheme for years. Still, the current government has no plans to change the fundamental settings, with Prime Minister John Key pledging to keep all current entitlements while he is in office.
FSC chair Jenny Shipley, a self-admitted late convert to KiwiSaver, is pushing for cross-party engagement on retirement income policy. While there isn't an immediate crisis, she says "decisive planning for future retirees" is needed.
"The longer we procrastinate, the more it will cost, and our options narrow - we don't want that," Shipley said. "New Zealanders continue to make it clear they want certainty so they can make their own plans."
Among other recommendations in the FSC plan are to retain the universal pension, require a proportion of KiwiSaver balances to be converted into a second pension to the value of NZ super with the remainder available as a lump sum, offer insurance to top available to top up the second pension up after a period of contributions, and introduce automatic enrolment into KiwiSaver every three years.
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