KiwiSaver enticing enough already
KiwiSaver, the new retirement savings scheme starting July 1, is coming in for criticism that is doesn’t include more tax incentives. But I’m glad of that.
The scheme does include one tax break. An employer’s contribution to their employee’s KiwiSaver account will be tax-free — up to 4 per cent of the employee’s pay or the amount the employee is contributing, whichever is lower.
But most people won’t benefit from that. Many employers won’t contribute, and many KiwiSaver members won’t be employed or will be self-employed.
Beyond that, the government is offering two other main incentives, which are not tax breaks:
- Everyone who signs up will get a $1,000 kick-start, which they keep as long as they contribute into the scheme for at least a year.
Members won’t, however, get their hands on the money for at least five years, except in cases of hardship or serious illness. And most people won’t get it until they reach the age that NZ Super starts, currently 65.
- Qualifying people can get a subsidy towards the purchase of their first home. After three years in KiwiSaver, they will get $3,000, ranging up to $5,000 after five years in the scheme.
They will also be allowed to put their KiwiSaver savings into their first home, although they will have to leave the $1,000 kick start in the account.
The government hasn’t yet said who will qualify for the first home subsidy. Nor has it announced details of another incentive — a subsidy on KiwiSaver account fees.
This subsidy may also be an incentive to sign up. But some in the industry say that because there will be more rules around KiwiSaver accounts than other similar savings options, total fees are likely to be higher. So, even after the subsidy, KiwiSaver fees might not be particularly attractive.
Never mind. The $1,000 and first home subsidy are quite enough incentives.
Why wouldn’t I want more? After all, many other countries offer tax breaks to people who save for retirement.
Let’s start by assuming that, with no tax incentives, people save in the best way for them. Some of those ways may not even seem like saving. They include:
- Repaying credit card and other high-interest debt — an excellent use of spare money.
- Repaying a mortgage faster than necessary.
- Getting an education that’s likely to lead to higher pay and hence more savings in the long term.
- Starting or running a business.
These moves can all benefit the “saver” more than putting money into a managed fund. In many cases, too, New Zealand benefits from its citizens’ paying off debt, gaining higher qualifications or nurturing a business that provides jobs and goods and services.
If people are enticed out of these and into managed funds by tax incentives, they — and arguably society as a whole — are worse off.
The other issue with tax incentives is that the government still needs the same revenue to run the country, so it has to get the money from elsewhere. That can mean higher-than-otherwise tax rates.
The result: Those who can’t take advantage of the tax incentives — often people on lower incomes — can end up supporting those who can, via their taxes. That’s hardly fair.
While we’re at it, there are rumours that KiwiSaver may, somewhere down the track, be made compulsory.
In that case, even more people would be putting less into debt repayment, further education and business building because their spare money would be going into the compulsory scheme.
Doesn’t sound like a good idea to me.
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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.