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APN Newspapers March 2012: A big year for KiwiSaver
In the annals of KiwiSaver history, 2012 will be notable for two things. It will mark the start of a two-year shift away from government input and towards more employee and employer input, and it will be the first year in which members can withdraw their savings in retirement.
While there have been minor reductions in government support in the past - including the cancellation of the $40 annual fee subsidy - the changes this and next year are more significant.
Some people view these changes as a disappointment, but others say they are fairer to people who, for whatever reason, don't belong to KiwiSaver, because less taxpayer money will go into the scheme. After all, close to half the money that goes into KiwiSaver currently comes from the government. Of course the changes will also help the government's Budget.
There are three steps in the process towards less government participation and more employer and employee participation:
• The introduction, from April 1 this year, of tax on employer contributions.
Up until now, when employers contributed 2 per cent of their employees' pay, that money was untaxed - although if the employer put in more, the extra was taxed. From April, the whole lot will be subject to what's called the employer superannuation contribution tax.
That tax is calculated on your taxable income plus your employer's contribution, and ranges from 10.5 per cent to 33 per cent (see table). For most people, the tax rate will be the same as their income tax rate.
For those on lower incomes, the new taxation won't make much difference, but people on higher incomes will see considerably smaller employer contributions.
• Halving of the tax credit.
This will be noticeable around July and August, when providers put annual tax credits into KiwiSaver accounts. In the past, if you contributed $1043 or more you received $1043, and if you contributed less than that your tax credit matched your contribution total.
From this year, though, the tax credit will be halved, to 50c for every dollar you contribute with a maximum tax credit of $521.
The change shouldn't affect KiwiSaver members' behaviour. It still pays to get at least $1043 into your account by June 30 to get as much as you can from the government.
For employees who earn more than $34,762, this will automatically happen, as 2 per cent of their pay is more than $1043. But anyone earning less than that, and all non-employees, will benefit from contributing directly to their provider whatever it takes to reach the $1043 total. A 50 per cent subsidy is still well worth getting.
• Increase in employee and employer contributions.
From April 1 2013, the minimum employee and employer contributions will rise from 2 to 3 per cent of pay.
Many employees will welcome this change. They will manage the increase in their input, and welcome the extra contribution from the boss. But some may struggle and have to take a contributions holiday.
Any employee who has been reluctant to join KiwiSaver because they feel they can't afford it might want to bite the bullet now and join while their minimum contribution is only 2 per cent of pay. It will be harder once the rate rises to 3 per cent.
They will have to contribute for at least 12 months - unless they get into financial difficulties - but after a year they can take contributions holidays for as long as they want to. Mind you, once they are used to a year of 2 per cent contributions, many will probably manage the transition to 3 per cent.
The other 2012 development is that, from July 1, people who joined KiwiSaver on the very first day, July 1 2007, and who are 65 or older will be able to withdraw their KiwiSaver money. And from then on, anyone who has been in KiwiSaver at least five years and has reached NZ Super age - currently 65 - can take their money out.
The first thing they should realise is that they don't have to do anything. Tax credits will stop, and so will compulsory employer contributions, but they can leave the money in their KiwiSaver account, earning returns, for as long as they wish. They can also make further contributions.
People in this situation should treat their KiwiSaver money like any other retirement savings. If they have debt, pay that off. Otherwise, perhaps use some for travel or other projects and using the rest to supplement their other income for day-to-day needs.
One more probable KiwiSaver landmark for 2012: If membership growth continues at the current pace, the two millionth person will join some time around August.
NZ Herald article May 2010: Reasons for not being in KiwiSaver rarely make sense
The government's 2010 Budget included some good news for KiwiSavers. But the question remains: Will that change the minds of those who haven't yet joined the scheme?
The most obvious Budget change is that the top tax rate on PIEs will drop from 30 to 28 per cent on October 1. And the lower PIE tax rates will also fall, in line with reductions in income tax rates. Almost all KiwiSaver funds are PIEs.
Furthermore, people who say they can't afford KiwiSaver may cope better with having money taken out of their take-home pay when the October tax cuts increase that pay. True, prices will rise at the same time because of the GST increase. But it still might be psychologically easier if these people don't see their take-home pay decrease.
More subtly, the increase in GST and decrease in income tax should encourage saving. If you spend the money you pay tax; if you save it you don't, or at least not now. And deferring tax helps people to build wealth - if they are willing and able to do so.
Almost one third of New Zealanders are now in KiwiSaver. But that's the easy third. Who are the others, why aren't they members, and are their reasons valid?
About 570,000 are over 65, and therefore not eligible. But what about the other 2.4 million?
Nobody knows for sure why they haven't joined a scheme that offers them $1000 upfront plus thousands more dollars from the government and - if they are employed - thousands more from their employer. But letters to my Herald Q&A column and questions and comments at seminars and lectures reveal some common reasons behind their reluctance.
While a few reasons are sound, the vast majority reflect lack of information, misinformation or thinking that isn't logical when examined.
Surprising though it may seem, there are still some New Zealanders who know next to nothing about KiwiSaver. And misunderstandings are common. Some think the scheme is only for employees. And some think they can't use the KiwiSaver tax credits because they pay no tax - not realizing the misnamed credits are actually gifts into KiwiSaver accounts.
Others think joining KiwiSaver commits them to contributing for many years. In fact, employed people must contribute for just one year, after which they can take contributions holidays until they retire. And if they strike financial hardship during that first year, they can stop sooner. Everyone else - self-employed or not employed - makes no commitment at all.
There's another large group - possibly the largest - who simply haven't got around to it. Some of these will join when they get a new job and are automatically enrolled, but not everyone changes jobs. Some say they just don't know how to go about it. Others have gathered so much information about different providers they can't decide which one to go with, so they go with nobody.
Their lethargy is costly. For every month of delay they miss out on up to $87 of tax credit plus employer contributions. That can translate into many thousands of dollars in retirement. See sidebar.
Here are some other frequently voiced reasons for not joining KiwiSaver, and my responses:
• "I don't like tying up my money until retirement." This is one of the few valid objections to KiwiSaver - although some people like the tie-up as it stops them from frittering away their savings. Note that you can withdraw at least some of your money if you suffer serious illness or financial hardship, or leave New Zealand permanently. If you die before NZ Super age, the money goes into your estate so your heirs can get access to it. You can also get some money out to buy a first home.
• "I can't afford it." Non-employees can contribute zero, and still get the kick-start. Employees must contribute 2 per cent of pay for a year - which isn't much. On $30,000 it's less than $12 a week, and on $50,000 it's less than $20 a week. As explained above, it might be easier to join when your pay goes up at tax-cut time in October.
• "I should repay my debts or mortgage first." It's probably best to clear high-interest debt first - although even that is debatable. And number crunching shows that almost everyone with a mortgage is better off in the long term being in KiwiSaver. They should contribute just 2 per cent of pay, or $1,043 a year for non-employees, and put any further savings into their mortgage. The exception is non-employees under 30 with mortgages - a small group - and even they are better off in KiwiSaver once they turn 30.
• "I want a safer investment." There are KiwiSaver funds that hold only bank term deposits, local government securities and government bonds. Investing doesn't come much safer than that.
• "My KiwiSaver provider might get out of the scheme." Three - Asteron, eosaver and IRIS - already have. Your account is transferred to another provider and, if you don't like that, you can easily move. Just contact your chosen provider, and they will do it for you.
• "I'm already in a good super scheme." Even if it's better than KiwiSaver, most people benefit by belonging to both schemes. If you can't afford it, it's worthwhile to dip into savings or add to your mortgage so you can contribute to the two schemes.
• "I can do better with other investments." That's highly unlikely, given the boost your savings get from the KiwiSaver incentives. Do KiwiSaver only to the extent you get all the incentives, and make further savings elsewhere.
• "Managed fund fees are too high." The incentives make KiwiSaver a good investment despite sometimes high fees. Anyway, you can choose a low-fee provider by using the KiwiSaver fee calculator on www.sorted.org.nz.
• "Capitalism is grubby and I don't want to be part of it." About 24 KiwiSaver providers offer ethical or socially responsible funds, or "ethically" screen all their investments. There's something for every sensibility.
• "I don't need to save more." Great. But join KiwiSaver and divert some of the government's and your employer's money to your favourite charity.
• "I don't trust this or future governments not to change KiwiSaver, or even confiscate government contributions." If you dislike any rule changes, you can always stop contributing, and be glad you were in while the going was good. Confiscation is hardly likely in such a popular scheme. This is, after all, a democracy.
• "A future government could reduce NZ Super for KiwiSavers." True, but surely they would also include people with other savings. While all savers could be affected by future means testing, they would still be better off than non-savers. Would you rather get by in retirement on NZ Super only?
• "My employer doesn't want to contribute and (a) I'm scared to make a fuss, or (b) it's my friend or family and I don't want to force them." We're talking a mere 2 per cent of pay here. Their reluctance doesn't say much for how they treat their employees. If you must, negotiate a smaller or zero pay increase in exchange for their co-operation.
• "I'm too young to care about retirement." Understandable. So join KiwiSaver for the first home help. You'll be able to put employer contributions and returns on your account into your first home - money you wouldn't have outside KiwiSaver - as well as your own savings. And you might also qualify for a $3,000 to $5,000 first home subsidy.
• "I'm going overseas soon." Join before you go. You won't get the tax credits while living abroad, but your KiwiSaver balance will probably be growing. And if you plan not to return to New Zealand, after a year you can take out all except the tax credits, which go back to the government. (This may change for people moving to Australia.) Alternatively, you can wait until NZ Super age and then take out the whole lot.
• "I'm too close to retirement." KiwiSaver works particularly well for 60-pluses. You can get more than $6000 from the government, plus employer contributions, and your money is tied up for only five years.
Clearly many New Zealanders misunderstand how to make KiwiSaver work well for them. Much more education is needed. While some New Zealanders will never join unless the scheme becomes compulsory, there are probably many more who would join if they knew more.
NZ Herald article January 17 2008: Perspectives article on poor KiwiSaver performance
Earlier Herald article criticising KiwiSaver is misleading for two reasons.
I feared this would happen. Share markets would go through one of their down periods right after KiwiSaver started, and people would leap to the conclusion that the retirement savings scheme was not a good idea.
Sure enough, a story to that effect featured prominently in the Weekend Herald's Business section last Saturday. The story, quoting a former high school maths and economics teacher, began "KiwiSaver has so far been a KiwiLoser, eroding more wealth that it is creating." That is grossly misleading. Anyone who avoids KiwiSaver because of it is doing themselves a big disservice.
Before we look further at that, it's important to acknowledge that there's plenty to criticise about KiwiSaver:
· Michael Cullen and Peter Dunne should be challenged about their enthusiastic announcements of the numbers who have signed up. Most recently, they said 381,000 had joined KiwiSaver in its first six months - far more than the 276,000 expected for the first full year.
But where did the 276,000 come from? Before KiwiSaver started, Inland Revenue said 700,000 New Zealanders change jobs every year - almost all of whom will be automatically signed up for KiwiSaver in their new jobs.
These people can opt out after two to eight weeks. But early data show roughly half are sticking with the scheme - and well they might, given the incentives. Let's guess at 225,000 out of 350,000 for the half year.
Add to that the rush of people savvy enough to realise they would be mad not to join KiwiSaver- and the sooner the better - and 381,000 in the first six months seems disappointing rather than exciting.
I can't help but wonder if the government set the first-year goal at 276,000 so they could repeatedly say, in an election year, "Wow, aren't we doing well."
· The scheme shows many signs of being put together in great haste. One example: the name of the tax credits. Many people think they can't take advantage of them because they don't pay tax. But the credits in fact have nothing to do with tax. The government simply puts the money in your KiwiSaver account.
And there are many other KiwiSaver features that could have been simpler or more efficient if officials had been given more time to develop them. What was the hurry? Again we must cast our eyes towards the end of this year.
· Through KiwiSaver, the government is spending huge amounts of money persuading thousands of people to do what they were going to do anyway.
Many of us who were already saving for retirement have simply moved some of that saving into a KiwiSaver fund, grinning as the $1000 kick-start and $40-a-year fee subsidy are added to our accounts. Our grins will be even wider when we get our first tax credits - up to $1043 a year - some time after July. And employees will be happier still, when compulsory employer contributions start in April.
Sure, there are undoubtedly thousands of others who have joined KiwiSaver who weren't saving before. But who knows how many? Over all, it's not clear that KiwiSaver is a good use of taxpayer money.
For individuals, however, it's a different story. It's crystal clear that contributing to KiwiSaver is a great use of their money - regardless of the poor recent share market performance noted in last Saturday's story.
The story quoted former teacher Gary Osborne, who searched websites and found that in all but 5 of 24 KiwiSaver funds, "savers would be better off if they had slept with their funds under the mattress for the first six months of operation, before allowing for the government contribution."
But let's look more closely at his last six words. They make all the difference. The whole point about KiwiSaver - the reason I and others say everyone should be in it - is that the government contributions turn any otherwise mediocre investment into a really good one. Not allowing for them is like celebrating Christmas without Santa Claus.
There's another important issue here, too. It's a big mistake to judge any investment that includes shares over any period less than about ten years - let alone six months. And it's actually just three months, as KiwiSaver providers didn't get the money until October. Before that it sat in Inland Revenue, earning interest.
The share market often declines over short periods, but the long-term trend is always upwards. It's rare for people who invest in shares or share funds to lose money over ten or more years, and common for them to do extremely well. And that's before adding the KiwiSaver incentives.
Still, some people - presumably including Osborne - can't cope with seeing the value of their investments fall. For them, there's a great alternative: a conservative KiwiSaver fund that invests in stable assets such as bank term deposits and government bonds.
Such funds won't grow nearly as fast as riskier funds over the long term. But by the time you add the KiwiSaver incentives, you can be confident you will do better than in a bank account - let alone under any mattress.
NZ Herald article December 19 2007: Concern over remarks on old-age support largely unwarranted
People should not be put off joining KiwiSaver because entitlement may eventually occur later
My biggest concern about Diana Crossan's discussion about raising the NZ Super age and cutting KiwiSaver incentives is that it will discourage some people - especially the financially unsophisticated - from joining KiwiSaver.
There's not much logic behind the discouragement.
True, raising the NZ Super age will also raise the age at which KiwiSaver members get their hands on their money. But such a change would be phased in over many years, probably affecting only those currently in their 40s or younger. For them, adding a year or two to a tie-up of 20-plus years ought not to make much difference.
As for reducing KiwiSaver incentives, that's all the more reason to join now and grab the $1000 kick-start, annual tax credits and employer contributions while the going is good.
But what if the incentives are lowered and you're stuck in the scheme?
Not everyone realises that you can put KiwiSaver on hold if you no longer wish to take part. Employees can take contributions holidays after a year of membership. And everyone else - beneficiaries, the self-employed, early retirees and other non-employees - can simply stop contributing whenever they want to.
"OK," say the suspicious. "But a future government might cancel contributions holidays?" That would surely happen if KiwiSaver became compulsory - at which point everyone who has already joined would be glad they were members while the incentives were available.
Short of compulsion, though, I have trouble picturing a government cancelling contributions holidays. It would be seen as hugely unfair, giving rise to sad stories in the media of struggling families who would have been okay if they had never joined the scheme. And what kind of message would that send to people who had not joined KiwiSaver? Nobody else would sign up.
Don't forget, too, that up to a point, the more people contribute the more the government has to contribute. Cancelling contributions holidays would cost the government plenty.
Similarly, other possible future changes to KiwiSaver shouldn't put anyone off joining now.
For example, Crossan considers - although unenthusiastically - the possibility of income testing NZ Super. Such talk can lead some to ask, "If the government is going to cut my super because I've got income from KiwiSaver, why should I bother with KiwiSaver?"
My reply: If income testing was introduced, I'm sure the government wouldn't cut NZ Super by a dollar for every dollar retirees receive from their savings. Again, think of the message that would send to non-KiwiSavers. It's more likely to be 30c or 50c less Super. Savers would still be much better off than non-savers.
And those hell bent on getting every last buck from the government should realise they will probably get more by being in KiwiSaver than out. For many, the incentives will outweigh any reduction in NZ Super.
While you might not feel totally reassured by Labour and National's protestations that NZ Super won't change, don't let doubt keep you out of KiwiSaver. It's actually all the more reason to join.
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