KiwiSaver provider, Simplicity, has calculated the impact of the Tax Working Group (TWG) recommendations on the average KiwiSaver member at retirement. Here are its findings:
If all four recommendations (outlined below) are implemented, a member earning $40,000 p.a. and contributing at 3% of salary will have between $80,125 and $108,932 more in their KiwiSaver account at retirement.
For someone earning $70,000 p.a. and contributing at 3% of salary, the KiwiSaver member balance at retirement will be between $841 lower and $7,307 higher.
For someone earning $100,000 and contributing at 3% of salary, the balance will be between $13,536 lower and $274 higher.
Assumptions:
- An investor starts at age 20, earns either $40,000, $70,000 or $100,000 per year and has contributions of 6% (3% employee and 3% employer).
- Their salary increases by 1% per annum.
- Their starting balance is $0.
- They retire at age 65.
- The capital appreciation from NZ Shares that would be subject to CGT is 3.8% p.a. (based on 20-year data).
- The capital value from Australian shares that would be subject to CGT is 3.6% p.a. (based on 20-year data).
The key recommendations of the TWG for KiwiSaver members were:
1) Elimination of tax-free capital gains on NZ and Australian shares.
Assuming no changes to current asset allocations, this would reduce returns for all KiwiSaver members. The impact on KiwiSaver growth fund returns is estimated at -0.30% p.a., and -0.20% p.a. for balanced funds.
For the average KiwiSaver investor on a salary of $40,000 and contributing at 3% their whole working life, the reduction in returns is $34,170 and $18,047 respectively.
For someone earning $70,000 and contributing at 3% of salary, the negative impact will be a $36,876 and $20,406 respectively.
For someone earning $100,000 and contributing at 3% of salary, the impact will be a reduction of $49,570 and $27,438 respectively.
2) A 5% drop in the PIR tax rates for the 10.5% and 17.5% PIR investors.
The new rates of 5.5% and 12.5% would improve KiwiSaver fund returns for those earning less than $70,000.
For the KiwiSaver member on a salary of $40,000, the impact is positive and the gain is $65,368 for a growth fund and $40,671 for a balanced fund.
3) Removal of the current Employer Superannuation Contribution Tax (ESCT) for those earning under $48,000.
This benefits a member earning under $48,000, with no change for those earning more.
For the KiwiSaver member on a salary of $40,000, the impact is $33,871 for a growth fund and $25,268 for a balanced fund
4) The government tax credit contribution to increase from 50c per $1 invested up to 75c per $1.
All KiwiSaver members receive an additional benefit of $260 per annum assuming they meet the minimum contribution threshold of $1,042 via either employee or voluntary contributions.
When adding the increased member tax credit to the portfolios and projecting out 45 years, there is a marginal benefit in the difference between the new portfolio value versus the status quo for a lower income earner.
The small benefit for a $40,000 income earner is due to the lower tax rate applied to their portfolio compared to the higher income earners.
Combined Impact:
Assuming all changes come into effect, the impact of the various components is summarised below:
| Growth Fund | |||||
| Income level | Employer Super-annuation Contribution Tax removed | Prescribed Investor Rate reduced from 17.5% to 12.5% | Capital Gains Tax introduced | Member Tax Credit increased | Net impact |
| $40,000 | $33,871 | $65,368 | ($34,170) | $43,861 | $108,932 |
| $70,000 | no benefit | no benefit | ($36,876) | $36,034 | ($841) |
| $100,000 | no benefit | no benefit | ($49,570) | $36,034 | ($13,536) |
| Balanced Fund | |||||
| Income level | Employer Super-annuation Contribution Tax removed | Prescribed Investor Rate reduced from 17.5% to 12.5% | Capital Gains Tax introduced | Member Tax Credit increased | Net impact |
| $40,000 | $25,268 | $40,671 | ($18,047) | $32,233 | $80,125 |
| $70,000 | no benefit | no benefit | ($20,406) | $27,713 | $7,307 |
| $100,000 | no benefit | no benefit | ($27,438) | $27,713 | $274 |
What the calculations show is that lower earning KiwiSaver members significantly benefit from the suite of proposed changes, with little or no benefit for higher income earners.
13 Comments
Those earning $40k or less are a significant number of income earners and the net benefit to their retirement fund is good, and they will really need that money.
For higher earners putting in the $87 per month minimum and investing outside of KiwiSaver is the best option. The equivalent to 0.2-0.3% fee is terrible and their are offshore funds that provide lower management fees.
It looks like investment in the NZX listed companies is being discouraged which is unfortunate. Why invest in New Zealand companies? Other countries that have benefited from their KiwiSaver equivalent have benefited greatly from investment in their own country, but let's ignore history.
Not sure where you are getting your numbers for those income earners below $40K being significant from as the Stats NZ LEEDs database suggests that just under 10% of the working-age population is earning less than $40K (around 260,000 aged between 20-24yrs).
You are also missing out the impact a member tax credit has and receiving this each year is a substantial boost to lower-income portfolios.
Why would I put in $87 per month into a fund outside of KiwiSaver when the member tax credit gives me an equivalent 50% return on that money?
The investment in NZX companies will continue as the total return from the NZ market over the last 10yrs say has been 14.5% before tax and fees and even after taking off 20-30bps I would take the 14.2% to 14.3% every time versus going offshore under the FIF/FDR regime and getting around 10% from global shares.
Rather than just concentrating on the capital gain component I suggest looking at the bigger picture and making
an informed decision.
CGT will turn Kiwi saver into a dog. There have already been so many changes to Kiwi saver since its inception. The politicians won't stop mucking it around. Lets get back to basics where you only get out of it what you put into it and leave contributions and earnings untaxed until 65 with tax being paid then, It is supposed to be a Pension type savings. with the power of compound interest over the Workers working life. BUT hey why the existing changes now, because the Government needs the tax now.
Kiwi Saver needs to be universally applied and super simple. I detest entirely these little fiddling changes and supposed fine tuning. ThEs just add to the mess.
If they want to deal with inequality they need to do it at the source which is incomes. Even before it is taxed. A bigger pie all round is the way, far superior to fighting over the size of slices.
Make it compulsory. ( It's poor people who need Kiwisaver most ) Lift the contribution tpo something effctive. Why have a government contribution. - it soaks the taxpayer to pay the taxpayer.
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