3 ways that KiwiSaver just got even better
This month is a big one for KiwiSaver, with several changes taking effect that make the scheme more attractive — including a little publicised tax break.
The best known change is that compulsory employer contributions started from April 1. Every employer must contribute 1 per cent of pay to each employee member of KiwiSaver. This will rise to 2 per cent next April, 3 per cent the following April and 4 percent from April 2011 onwards.
What is less known is that in many cases an employer can contribute more than 1 per cent at no cost to them.
This arises because the government reimburses employers for their contributions, up to the amount they contribute for each employee or $1,043 a year, whichever is lower.
With employees putting in at least 4 per cent of their pay, everyone earning more than $26,000 a year that will contribute more than $1,043. So employers can contribute $1,043 to each of those employees — considerably more than 1 per cent for everyone but the highly paid — and get the whole lot back.
Some employers say this is difficult administratively. But others are leaping at the chance to give their workers extra savings — at the expense of taxpayers. Employees might want to discuss this with their bosses.
Also in April:
- Tax rates on the returns on almost all KiwiSaver accounts — the interest, dividends and rents earned on the invested money — will be taxed at a maximum of 30 per cent.
This change actually applies not only to KiwiSaver but to all managed funds that have set themselves up as portfolio investment entities or PIEs.
KiwiSaver funds don’t have to be PIEs. And in a provider survey for an upcoming book I’ve found one non-PIE option offered by ABN Amro Craigs, in which you can select from a range of shares for your KiwiSaver portfolio. But all other KiwiSaver funds are PIEs, and therefore enjoy considerable tax breaks.
One break applies to people with non-PIE taxable income of less than $38,000, and total taxable income of less than $60,000. All their income will be taxed at 19.5%, even though their PIE income may take them above the $38,000 threshold at which their tax rate would normally rise to 33 per cent.
Let’s look at someone on a $35,000 salary who earns PIE income of $20,000 — and many people will earn at least that level of PIE income after some time in KiwiSaver.
The tax on that $20,000 will be $3,900. If it were earned in a non-PIE investment, the tax would be $6,195.
Another tax break is for higher earners. The maximum tax rate on PIEs used to be 33 per cent — already a big reduction for those in the 39 per cent tax bracket. On April 1 it dropped to 30 per cent.
That means an investor earning $38,000 to $60,000 will pay $300 less tax for every $10,000 they earn in a PIE versus elsewhere. And an investor earning $60,000 or more will pay $900 less in tax.
Furthermore, PIEs that invest in New Zealand and many Australian shares won’t be taxed on capital gains on those shares, even if the shares are traded frequently. In non-PIE share funds or direct investments in shares, those gains would be taxed.
- All KiwiSaver providers have to say in their investment documents whether they offer ethical investments — sometimes called socially responsible investments.
This is likely to lead to growing interest in this type of investing, which I will go into in my next column, in two weeks.
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.