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Kiwibank advocates annuities, KiwiSaver compulsion

Friday 17th December 2010

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State-owned Kiwibank wants the KiwiSaver scheme to become compulsory for all New Zealanders with income above a prescribed level.

"In our view, compulsory KiwiSaver would significantly increase retirement incomes, and therefore quality of life in retirement, for many New Zealanders," Kiwibank said in a submission to the Savings Working Group.

"It would also provide a significant savings cushion, reducing dependency on Government benefits and health care - effectively lowering the fiscal cost of retirement," Kiwibank said.

It also comes out against the so-called Nordic model under which capital income is taxed at a lower rate than labour income.

"While the Nordic model is theoretically attractive, we consider it is less suitable for New Zealand," Kiwibank says. This is because the model relies on a capital gains tax, which New Zealand does not have.

It also argues that New Zealand's PIE regime provides a vehicle for taxing savings at a lower rate as savers are taxed as a maximum rate of 28% compared to the top marginal income tax rate of 33 percent.

"In short, a full Nordic model is likely to make the system more complex and we consider it would be difficult to apply in practice," Kiwibank said.

The Savings Working Group might wish to consider whether prescribing a minimum amount of the New Zealand Superfund's capital to be invested onshore would help improve the depth and robustness of New Zealand capital markets and provide a platform for future growth, Kiwibank said.

While increasing investment potential, a larger domestic savings pool could also lower reliance on offshore funding.

Kiwibank also advocates retirement stream products like annuities.

From July 1, 2012 eligible KiwiSaver members will be able to make lump-sum withdrawals of their retirement savings. The amounts involved will be significant and will increase over time.

"Retirees will face difficult decisions about how best to invest these lump-sums so as to provide a reasonable standard of living during their retirement.

The risk for the Government is that retirees make poor investment choices and end up being dependent on state benefits.

"Annuities make budgeting easier and reduce the need for ongoing management of retirement savings. A lifetime annuity can also mitigate longevity risk and provide peace of mind for retirees and their families," Kiwibank said.



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