This article was published on 21 July 2007. Some information may be out of date.

Q&As

  • Are the 65-pluses getting a raw deal?
  • One reader thinks richer superannuitants are already spoilt.
  • Self-employed reader doesn’t realise what a good deal he’s on to.
  • KiwiSaver options for small business couple.

QIn all the publicity surrounding KiwiSaver it appears that people over 65 years have been totally ignored.

At a time when all the elderly would welcome a little benevolence from the government we find, instead, that we are the only Kiwi citizens excluded from KiwSaver and are unable to benefit from the $1000 starting bonus and matching contributions.

To add insult to injury we continue to be fully taxed on those savings/pensions that we have managed to accumulate from our net income over many trying past years. This is exacerbated by the effect of fiscal drag.

If the government insist on ignoring the elderly, those probably in the most financial need, the least they could do to balance the position is to provide us with a matching annual tax credit of $1000.

I would welcome reading your opinion on this question.

ASorry, but I’m not so sure that you will welcome what I say. While it would make me feel warm and fuzzy to urge the government to give more to the elderly, I can’t justify it.

Every dollar given to your age group is a dollar less for somebody else. And research shows that you are not, in fact, the ones in most financial need. Quite the opposite.

As Simon Collins said in the Herald last Saturday, “An official living standards survey published last year found much lower levels of hardship in the 65-plus age group than in any younger group, even though many depend solely on NZ Super.”

Also, while I hate fiscal drag, it doesn’t tend to hurt the elderly as much as younger people.

Fiscal drag is what happens when people’s incomes increase, pushing them into higher tax brackets. Their pay rises may not even keep pace with inflation, but they pay more tax.

Inflation is low now. But still, fiscal drag — a.k.a. bracket creep or tax by stealth — hits us hard over the years. In 1996, less than 5 per cent of taxpayers were in the top $60,000-plus tax bracket. By 2008, it’s expected to be 14 per cent.

And the proportion in the $38,000 to $60,000 bracket is expected to rise from 10 to 18 per cent.

In May 2005, the government said it would counter this, from April 2008, by raising the tax bracket cut-off points by 6.12 per cent every three years. But in the latest Budget, it cancelled that.

That change means the government will get $1.44 billion more in tax over the next four years, says BNZ chief economist Tony Alexander. That’s approaching the $1.6 billion it expects to give back to New Zealanders — although not our hapless correspondent — through KiwiSaver tax credits.

And, because the KiwiSaver money isn’t inflation-adjusted, it won’t take long before fiscal drag will more than offset it. “The upshot is that the government has increased the personal income tax burden in this year’s Budget”, says Alexander.

Fiscal drag is nasty. And retired people are affected to the extent that their income rises. But it’s less likely to rise significantly than the income of younger people working their way up in their careers.

All in all, then, I’m afraid I don’t agree with you. You already get a pretty nice deal in the form of NZ Super. Too nice a deal, if you ask our next reader.

QAll the KiwiSaver talk has reminded me of the irony of NZ Superannuation not being means tested.

The fact that rich people, who don’t need it, still demand their $160 a week “because they have paid taxes their whole lives” shocks me.

Why isn’t it means tested? Turn 65 and suddenly dole bludging is ok?

A handout is a handout, even if it’s wrinkly. And hesitating about contributing to KiwiSaver “because not everyone might, and it might mean we didn’t have to because they are taking it off our Super” just seems incredible petty. I’ve just now realized why it’s called “means” testing. Ha, ha.

ASteady on. Getting NZ Super is hardly dole bludging. There’s no deception or exploitation of the system.

I tend to agree, though, that it’s strange that the government gives money to wealthy older people while some children are undernourished.

It’s probably partly because it’s hard to means test fairly. There can be huge variation in the valuing of assets. And already thousands of wealthy families use trusts or financial trickery so they can claim student allowances or rest home subsidies. With means-tested NZ Super it would be even worse.

Think of the brainpower and resources that would go, on the one hand, into this game playing, and on the other hand into monitoring it.

Still, there must be some country around the world we could copy that has worked out a way to means test effectively.

And I fully agree that not joining KiwiSaver because it might mean you’ll get less NZ Super isn’t a smart attitude.

As I’ve said, surely any future government will make sure savers are better off than non-savers. Otherwise the young at that time wouldn’t save.

If you end up getting less from the government than you put in over your lifetime, you’re one of the lucky ones. Life has treated you better than many others.

By the way — and this is just going to make our correspondent crosser — NZ Super isn’t $160 a week. It’s $277 for a single living alone, and $426 for a couple.

QI’m sceptical about KiwiSaver. I’m self employed but manage most of my tax via PAYE.

If I opt into KiwiSaver then I have to contribute 4 per cent, but in a few years my employer (me) will be forced to contribute 4 per cent, so I’ll be forced to contribute 8 per cent or abandon PAYE.

AYour letter has puzzled people at Inland Revenue. They tell me you must be either:

  • A sole trader who may make regular tax payments, but you can’t be in the PAYE system, or
  • A person who has formed a company, which employs only you and pays you a salary, in which case PAYE would apply.

If it’s the former, you are not obliged to contribute any specific amount to KiwiSaver. And there are no employer contributions.

If it’s the latter, you will need to make employer contributions. But they won’t be taxed, and you’ll get government reimbursements of up to $20 a week.

At least in the year starting April 2008, when it’s proposed that employers will contribute just 1 per cent of employee’s pay, that reimbursement will cover all your employer contribution unless you earn more than $104,000. It’s like getting an extra government gift into your KiwiSaver account, over and above the usual so-called tax credit — a deal that many in your situation are eyeing as a plus of KiwiSaver.

Even in later years, when employer contributions grow, the government reimbursement will partly cover them.

Still, if you want to stop employer contributions — and you’ve been in KiwiSaver for at least a year — you can always take a contributions holiday for up to five years, and keep renewing it.

When an employee is on a contributions holiday, the employer doesn’t have contribute. Meanwhile, the employee can continue to put in any amount they wish. You might want to contribute $20 a week, to get the maximum tax credit.

QI am still not 100 per cent clear about KiwiSaver. Both my husband and I will join. We are in our late fifties.

My husband is self-employed, working from home — for him it is a case of finding the best provider directly. I do two or three days a month relieving as an early childhood teacher and help my husband with the administration, keeping the books, etc.

The accountant has allotted me an income of $5000 a year on the books. Because I am thus “officially employed” (the work takes about a day a week), does my husband have to go through the rigmarole of enrolling me and contributing through his company and make payments to IRD on a regular fortnightly basis?

I had hoped to just join a provider and pay a lump sum once or twice a year, with no contributions necessary from the company, to keep things simple. Perhaps you can clarify this situation.

AIt sounds as if your husband runs his business as a company, in which case he should read the Q&A above.

That means you are one of the following:

  • An employee. You should have PAYE deducted from your income, and if you join KiwiSaver, contributions will have to be deducted from your pay.
  • A shareholder-employee. No PAYE will be deducted, and there is no requirement for KiwiSaver contributions to come out of your pay. So you can go ahead with your plan of just joining a provider.

Even if you are an employee, though, there is another option. Anyone who holds more than one job can join KiwiSaver via any or all of the jobs. So you could join via your teaching job.

You would need to pay 4 per cent of that income into KiwiSaver during the first year. But after that, if you wish, you could go on contributions holidays and just make voluntary contributions when it suits you.

As explained in the Q&A above, if you are on a contributions holiday, you don’t get compulsory employer contributions, but you still get the tax credit.

QUICK KIWISAVER INFO

The huge number of questions coming in about KiwiSaver reveal that many people don’t yet understand the basics of the scheme. But I don’t want to keep repeating the basics because that will bore other readers.

To solve this, I’ve listed the rules and incentives, taken from my book, “KiwiSaver: How to make it work for you”, on www.maryholm.com. Click on the KiwiSaver book page and scroll to the bottom. You might very well find the answer to your question there. [This page has been removed from the website. Visit kiwisaver.govt.nz for up-to-date information.]

If not, I suggest you check out the Retirement Commission’s website, www.sorted.org.nz or the government’s www.kiwisaver.govt.nz. Alternatively, call 0800 KiwiSave (0800 549 472), Monday to Friday 8 to 8, or Saturday 9 to 1.

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.