Annual Tax on KiwiSaver Too High

Today’s must read:
KiwiSaver tax rates need fixing, world’s ‘most punitive’, says savings lobby

A new article in the National Business Review this morning highlights how high the taxes are on KiwiSaver accounts. When KiwiSaver was set up, the government decided to use an annual member tax credit incentive of $1042, but now only $521, instead of a reduced tax rate on earnings in KiwiSaver accounts. Back when balances were small, this was probably preferable, but now that many accounts have gotten larger this $521 a year is not so great. KiwiSaver schemes are taxed the same as PIE funds, so at the investors PIR of 10.5%, 17.5%, or 28%.

Yet the way compound earnings are taxed at the moment means a person paying the top personal tax rate of 33 cents in the dollar can expect to lose more than half (54.7 percent) of their KiwiSaver retirement income, “due to the impact of taxation over 40 years.”

This shows the effect that taxes and fees have on growth. Over the long term, small cuts every year from taxes and fees prevent the compounding growth of retirement funds.

When compared to private retirement schemes like the IRA and Roth IRA in the USA, our KiwiSaver tax rates seem extortionate. A Roth IRA basically allows contributions of after-tax money to grow completely tax free until they’re withdrawn at retirement where they are also withdrawn free of tax. There are limits on how much can be contributed per year and there are annual income limits above which contributions are not allowed. Allowing retirement funds to grow free of the drag of annual income taxes means much higher rates of growth.

Peter Neilson, chief executive of the Financial Services Council doesn’t go as far as suggesting a tax free account like the Roth IRA, but he does suggest cutting the KiwiSaver tax rates of 28, 17.5 and 10.5 to 15, 8 and 4.3 percent respectively. I would go further and say that for those in the lowest tax bracket, the PIR should be cut to zero considering that they are the ones that have the hardest time saving for retirement.

Further Reading:
The tax barrier to retirement prosperity in New Zealand, Financial Services Council.

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