This article was published on 13 December 2008. Some information may be out of date.

Q&As

  • Government’s KiwiSaver changes include a big improvement on their pre-election plans.
  • New taxation of KiwiSaver employer contributions is fair enough

Plus: readers’ views of my political leanings vary widely.

QWith the new changes to KiwiSaver, “contributions to KiwiSaver will be lowered to 2 per cent of the weekly wage, matched by Government,” the Herald said this week.

“However, the changes (proposed before the election) meant those earning under $52,000 would not get near the $1040 subsidy cap before they reached 2 per cent of their income.”

This week, “Mr English said instead of limiting the subsidy to 2 per cent of wages, there would be a dollar for dollar subsidy of up to $1040 for low and middle incomes.”

Does this mean that scheme members can elect a 2 per cent deduction from their wages to put into the scheme, and if this amount is less than $1040, they can manually top up their contributions with a sum equal to the difference to ensure they get the maximum $1040 tax credit?

AYes. And thank goodness for that. This was the big flaw in National’s earlier version of how it would change KiwiSaver.

Under the earlier plans, employees were stuck with a maximum tax credit of 2 per cent of their pay, which led to odd situations. For example, a beneficiary could contribute $1040 and receive an equal tax credit. But if he or she took a part-time $80-a-week job, the maximum tax credit would be just $83.20, regardless of how much he or she contributed.

The new version — passed into law by Parliament this week — brings lower paid employees in line with the self-employed and other non-employees, who can contribute as much as they like up to $1040 and it will be matched by the tax credit.

The other new KiwiSaver change is that the $40-a-year fee subsidy will end next April 1. This makes the scheme a little less attractive for everyone — but by no means to the point that it’s not worth being in.

Those most likely to notice the difference are parents of children signed up for KiwiSaver. Because children don’t get a tax credit until they turn 18, many parents have opened accounts so their children get the government’s $1000 kick-start but are making no further contributions.

Under current KiwiSaver rules, those accounts would generally be expected to grow over the years, with returns and the fee subsidy usually more than offsetting fees and taxes. But when the fee subsidy ends, accounts with no ongoing contributions are more likely to decrease in value.

Nonetheless, even if the $1000 dwindles over the years, it’s highly likely to be worth at least several hundred dollars by the time the child turns 18 and, hopefully, starts to contribute. It’s still money for nothing.

The other changes to KiwiSaver are the same as announced before the election. They include:

  • Compulsory employer contributions will still rise from 1 to 2 per cent next April, but they will no longer rise to 3 per cent in 2010 and 4 per cent from 2011.
  • The employer tax credit — a reimbursement of their contributions up to $1040 per employee — will end next April.
  • The tax exemption on employer contributions, currently up to 4 per cent of employees’ pay, drops to 2 per cent next April. More on this in the next Q&A.
  • No employee’s pay can be cut because they join KiwiSaver. But the government will permit employers to negotiate — in good faith — contracts under which non-KiwiSavers receive bigger pay rises to compensate for not getting KiwiSaver employer contributions. KiwiSavers will miss out on that extra money, so they will, in effect, be paying their own employer contributions.

While the last change might seem tough on KiwiSaver employees, the current prohibition on such contracts is tough on their non-KiwiSaver workmates.

In any case, no employee KiwiSaver will end up worse off than non-employee KiwiSavers — except that they have less flexibility in their first year of membership. And given that from April they will have to contribute only 2 per cent of pay for that first year, that shouldn’t be too difficult for most people.

QYour article in Wednesday’s Herald about changes making KiwiSaver fairer for all is disappointing. The KiwiSaver scheme has really been gutted — not so much by the original National Party policy but by the additions this week.

Yes there was a political mandate to remove the employer credit and to add a 2 per cent KiwiSaver option for those that could not afford KiwiSaver. But when this is combined with the recent changes in an apparent attempt to address the “unfairness to low income earners” they have effectively managed to destroy much of the value of KiwiSaver.

To make employer contributions taxable after 2 per cent is so counter to the aims of KiwiSaver.

  • There is now no incentive for an employee to trade off current income for greater employer contributions to KiwiSaver.
  • There is no benefit in an employee saving 4 per cent KiwiSaver instead of 2 per cent.
  • There is no incentive for the employer to subsidize an employee’s contribution above 2 per cent.

These decisions are likely to more than halve the cash flow into KiwiSaver — which I understood was supposed to be a source for investment in the real NZ economy? Remember most of the saving comes from the mid to high income group — not low incomes.

National had numerous better options — why not require that the employee match the employers contribution for the employers contribution to be “tax free” from 2 per cent and up to 4 per cent? That would have incentivised KiwiSavers to stay on 4 per cent contribution level.

These outcomes are typical of poor New Zealand Government. Labour changed the scheme radically after first introducing it, at enormous costs to the suppliers. Now in Government, National changes the scheme differently to how the policy claimed it would be.

And yes all your published material on KiwiSaver is now worthless and largely wrong. We need better economic and investment thought processes.

AYou and many others don’t seem to realise that the change to make employer contributions taxable after 2 per cent was in National’s KiwiSaver policy all along, from before the election. It has a political mandate, as you put it.

When National’s pre-election announcement was made, I mentioned this issue briefly, but I didn’t make a big deal of it for two reasons.

Firstly, it affects only the minority of employees lucky enough to receive employer contributions of more than 2 per cent.

Secondly, those people still get a really good deal from KiwiSaver. They receive the tax credit, plus higher employer contributions than most people — at least half of which will still be tax exempt. If they have to give a bit back to the government, I think that’s fair enough.

In any government policy, it can be easy to forget who’s paying for it — you and I and everyone else, including people who don’t want to be in KiwiSaver and people over 64, who can’t be in it.

You’re quite right about your three bullet points. Those incentives will disappear when the changes take effect next April. And the money going into KiwiSaver is likely to decrease.

But I’m sure it won’t halve, even if we compare it with what the inflow would have been from 2011 under Labour, when employers would have contributed 4 per cent.

You ignore several facts. One is that many lower-income employees and practically all the self-employed and other non-employees will continue to contribute the same $1040 a year as they are contributing now.

Also, tax credit inflow generally won’t change, except for those on lower incomes who contribute 2 per cent and don’t top up to $1040 — but that would be a minority of all KiwiSavers.

And let’s not overlook all those currently out of KiwiSaver but who will join because they can afford — or are willing to tie up — 2 per cent of pay but not 4 per cent.

In any case, I’m not convinced that the taxpayers should have been subsidising KiwiSavers at the current level — given that most of the saving is by those on higher incomes, as you say.

Everyone can still make further retirement savings in non-KiwiSaver vehicles. And that gives us more flexibility and access to our money should we need it.

Finally, it’s true that my book on KiwiSaver now needs updating. And for every day I miss on the beach this summer because I’m doing just that, I might feel a tiny bit peeved at the government. But the scheme is better, and the KiwiShow must go on.

HAPPY CHRISTMAS

This is the last Money column for this year — a particularly interesting year because of the election, changes to KiwiSaver and the rocky economy.

When my comments in the column run to the political, I try to simply praise what seems good and criticise what seems bad, regardless of who proposes it.

However, some readers clearly feel I’m biased. “Perhaps you need to take off your blue tinted glasses and have a closer look at what National wants to do with KiwiSaver,” wrote one reader in early October.

Just three weeks later, another wrote, “If you think the majority of people that read your comments think your idol Cullen has done a good job in investing his so called Cullen Fund then you are very badly mistaken…. Firstly, by reading between the lines you are a left wing supporter…”

To each his own perspective!

Another reader’s letter delighted me not just because he had found my published reply to him helpful. After some problems getting information from his bank, he writes, “They told me to call back again after October, and referred me to your column and your reply to my letter. (Yes, seriously!)”

While we’re on banks, one of my favourite emailed jokes this year was titled: “Letter to the Bank”. It reads:

“Dear Sirs: In view of what seems to be happening internationally with banks at the moment, I was wondering if you could advise me. If one of my cheques is returned marked ‘insufficient funds,’ how do I know whether that refers to me or to you?”

Every year at Christmas time I find myself saying sorry to the many readers whose letters to the column have gone unanswered.

This year, more readers than ever have written, so your chances of being published are rather slim. But I do appreciate your writing. Without you, it wouldn’t work. And thanks for your many kind comments about the column.

Have a fun and safe holiday. See you back here on January 24th.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.