The Retirement Tax That Wasn’t

We all just avoided a KiwiSaver tax  

A drawback of KiwiSaver is the continual tinkering with the scheme since it first launched. This time around, fortunately, we all just narrowly avoided a KiwiSaver tax.

The most recent ‘change-that-wasn’t’ was a law that would add GST to the fees all KiwiSaver members pay to KiwiSaver fund managers. For several reasons, this led to swift public outcry. Here’s why:

• This episode highlighted the passion of New Zealanders towards maximising their long-term savings and how the tax concept shows the power of compounding interest where small regular changes in amount saved or costs incurred has exponential consequences over time.

• Timing. There’s little doubt we’re amid a cost-of-living crisis. There seems to be little public appetite for additional costs or taxes, even if it was a tax on locked-in retirement savings.

• Target. The tax would have hit middle NZ hardest: the worst-off among us will probably wholly depend on taxpayer support in retirement, while the best-off New Zealanders usually aren’t squirrelling away money into retirement or superannuation schemes such as KiwiSaver. That leaves “middle NZ”, everyday working people who are KiwiSaver members, who would have shouldered the tax.

• Probable tax creep. In nearly all countries, including New Zealand, taxes like GST aren’t levied on financial services. This is usually due to the complexity involved, but it also helps avoid heavy costs being heaped on everyday people. If GST were added to KiwiSaver fees, inevitably a very nasty can of worms would be opened which would lead to suggestions other financial services should have GST added too, such as bank fees. Would even the most pro-tax among us really want GST to be added to everyone’s mortgage interest?

• The eventual impact. Modelling from the Financial Markets Authority (FMA) warned the new tax, and its compounding effects would hammer KiwiSaver balances by $103 billion by 2070, due to members losing more of their investment to fees. Deloitte had done its own modelling, which agreed broadly with the FMA’s. For context, that amount of lost savings is equivalent to more than half the size of New Zealand's 2022 GDP.

So, less than 24 hours after passing its first reading in parliament, the tax was withdrawn from the piece of legislation.

The Issue

The supposed issue is that financial services are currently exempt from GST, though some services are not.

The legislation was trying to streamline the rules by effectively mandating one rule for all, specifying that all management service fees be hit with a flat 15 per cent GST rate.

That would also have meant that millions of KiwiSaver members will be hit with higher taxes and therefore end up with lower savings balances.

KiwiSaver Is Still Worth It

The good news about this debacle is it shows how passionate many people are about KiwiSaver. Plenty of KiwiSaver features still make it a “no brainer”. Subject to criteria, the major drawcards of KiwiSaver membership include:

• Annual government contribution of up to $521 per year

• If employed, regular contributions from your employer

• KiwiSaver’s “set and forget” nature means it’s simple for anyone to be an investor. If you are employed, your contributions come out of your pay before you see them (which also helps you invest by dollar-cost averaging)

• Younger members might get additional funding toward the deposit on their first home

But, KiwiSaver Should Be the Sidecar

Despite the advantages explained above, KiwiSaver has a few significant drawbacks. These issues mean KiwiSaver falls well short of providing a total investment solution. Some of these are listed below.

Inflexibility

Strict withdrawal criteria mean that KiwiSaver investments will generally be inaccessible until: you're eligible for NZ Superannuation (the ‘pension’), you buy your first home, or a limited range of other criteria are met.

Limits

You can only be a member of one scheme at a time, and you can’t choose your own specific investments.

Complacency

Many New Zealanders think making minimum payments to KiwiSaver is enough to fund their later years, chances are these people are mistaken.

Meddling

This attempted tax is just one change among a steady stream of meddling which has occurred with KiwiSaver since it began over a decade ago, and which continue to take place.

What next?  

So, thankfully we all just avoided a retirement tax.

Depending on your individual situation, it’s usually best to only invest a small regular sum into KiwiSaver. This makes the most of the benefits the scheme offers. For most employees, this means a three percent contribution rate paid through salary, matched by an employer contribution.

After this regular payment is established with payroll, it’s a wise move to assess what to do with any other regular surplus funds you might have – if you invest any more in KiwiSaver you may unnecessarily lock those funds up for many years, and subject them to the next tax or undesirable change that could be introduced!

To determine a way forward, you might like to book in with us to discuss things like:

• Your existing KiwiSaver investment

• Alternatives to investing any more than the minimum into KiwiSaver

Either way, it would be our pleasure to assist, so get in touch today.