The Age Old Crisis and What Has KiwiSaver Done About It?
There is a global retirement crisis. The problem being there will soon be more retired people than paid workers to fund the retired people on public pensions and retirement benefits. Back home in New Zealand, we have a national crisis of our own. New Zealanders are on the whole more committed to getting a roof over their head now and getting into debt in the process, than striking a balance between having money to spend in retirement years as well as growing wealth in their family home. In the U.K. on the other hand they have a very different work based savings culture. “The UK is the only developed country whose public pension system now faces no long-term cost challenge.”1 That means that every other country in the world is in the same rough stretch of road as New Zealand when it comes to finding money to give out each month for retired people on government run superannuation retirement benefits and public pensions.
On December 13th 2007, the New Zealand Government took what is widely considered an important step toward strengthening the amount of additional money that people like you and I will have for our retirement years. They took this step to make sure Kiwis’ have *additional* private money for retirement only. That step was enshrining in law employer contributions to KiwiSaver plans. This means that of the 317,000 + KiwiSavers that have joined up, those that are employed, and aged 18 to 64 will get an extra contribution from their employers into their KiwiSaver each pay-day. This is a landmark in New Zealand’s short history and will assist KiwiSavers to maximise their returns on the money they put toward their retirement years.
The main points.
From April 1 2008, each enrolled KiwiSaver who is putting 4% of the salary or wages plus bonus or commission paid by the boss into KiwiSaver, will have an extra 1% over and above their current pay put in as well. This will be contributed by the employer without any tax taken off first. This is done by the PAYE system. You know you are on the PAYE system when your pay had 19.5% of 33% or 39% tax taken off before the boss pays your “wages” into your bank account. Your bosses’ KiwiSaver contribution is 1% of your “base salary” (normal wages, salary, bonuses and commissions).2 (Excluding taxable allowances, rent allowance etc)
3)http://www.chapmantripp.com/resource_library/published_article.asp?id=4739
- This 1% minimum compulsory employer contribution will start in April 1 2008. It will become 2% from April 1 2009*, and 3% from April 1 2010 and 4% from April 2011. These funds are only required to be paid to complying, registered KiwiSaver superannuation plans.
- These employer contributions are not available to be used for anything other than retirement funds – not for repaying loans, or buying a home, or for education funds etc.
- Presumably these employer compulsory 1% contributions are only going to apply for those employees 18 to 64 years old. Those under the age of 18, who work and have their tax deducted by PAYE will not be automatically be enrolled, and will not have the maximising benefit of compulsory employer contributions to their KiwiSaver plans.
- Those who are under the age of 18 who are working as employees should take advantage of KiwiSaver, and have the employer take 4% or even 8% out of their wages, no matter how small. Why? Because their personal contributions (as well as any other non government contributions to their KiwiSaver account) can be taken out of the KiwiSaver under the following circumstances, before age 65. They can take them out for their first, owner occupied home purchase. Get them saving early. Time compounds money into riches.
- Some employees have arranged for their employer to pay them 2% less, and make 2% tax free employer contributions while they make 2% contributions from the tax paid wages. Together this makes the 4% of the employee’s contribution to KiwiSaver. I call this the 2% 2% route it is also known as salary sacrifice.
- Those employees and self employed who can start paying themselves using PAYE who have taken the 2% 2% route to make up their 4% contributions to KiwiSaver have been rewarded. You may continue this arrangement until April 1 2010. At this point, employers will have caught up with your employer contributions and you would be required to put away 3% and 3% from your employer, and the following April 1st, 4% from yourselves and 4% from your employer. The rule of salary sacrifice is always 50% from you, and 50% from the employer.
- Stated another way, the last point says the transitional rules will apply to employees who join KiwiSaver before 1 April 2008 and contribute less than 4% (with employers paying the balance to 4%).2
I have no doubt from my research, which includes the very reputable and thorough work done by law company Chapman Tripp on the material before the select committee, KiwiSaver provider and government sources, that there has been some fiery discussions in Parliament on the KiwiSaver Employer contributions law change. National and anyone else not happy for Employers to be steam rolled by the Labour Government have sought minor changes which I shall not detail here. But what of the future?
Employers and employees alike that I speak to in my role as a KiwiSaver Adviser – signing up individuals from ages 0 to 64 are fair crying out for certainty about the future of KiwiSaver. What do the two main Finance Men think? I am relying on easily accessed internet material. There are two internet links that will take you deep into the archives of either a Labour Party website, or a National Party website. I will summarise the key points I wanted to highlight.
Labour’s Dr Cullen reports National as stating that they will not tamper with what the Labour Government has done when it comes to employer employee arrangements for KiwiSaver. In addition, Bill English, March 2007, “We have a national superannuation, a new and fast growing government savings fund (“Big Cullen Fund”) and KiwiSaver coming in on 1st July this year. KiwiSaver will offer incentives to people who can save to do so….On top of these three schemes…Compulsory superannuation isn’t required and doesn’t fit in the New Zealand system.” (Material in brackets inserted by me) See the links below.
So superannuation compulsion, and related tax incentives as in Australia, which has been a huge success, and has been a significant factor in the growth of the Australian Share market, caused the Australian share market to become the 4th largest in the world, is not to be the fate of New Zealand?
http://billenglish.co.nz/index.php?/archives/110-Compulsory-Superannuation.html
http://www.labour.org.nz/our_mps/michael_cullen/news/20070629_news_english_suggests_scrapping_kiwisaver_extensio.html
These links are not up to date, and it would be very beneficial to know what is on National’s mind now, as what is on Labour's mind is now law.
Some will be wondering if the KiwiSaver is portable, can I take it from work place to work place? Yes.
- For most employees, compulsory employer contributions to KiwiSaver must vest immediately in the employee. But as I mentioned above, there has been some wrangling going on in the Parliament, and largely for the benefit of major employers, this rule has some exceptions. If the exception applies vesting must be within 5 years.2
Anything in it for the Employer?
I firmly believe employers that embrace KiwiSaver and contract a KiwiSaver Adviser to encourage it among staff; as difficult as the timing is, with it coinciding with an enforced 4 week employee holiday, and other matters relating to employment, will discover in 5 years time that their KiwiSaver employees have become more financially literate, and more settled. How do I come up with this unique personal opinion? (This looks like it may be biased I know). I’ve been a Financial Adviser since 1998 working with both business owners and individuals I've run work place savings plans for employees and arranged private savings plans as well. I’ve worked on part of a very large and diverse client base of Superannuation savers. I’ve met young people and those in the middle of their working years that have larger than average superannuation accounts, and those that stopped them early, and have little in place for their futures. In making my statement about employees with financial assets, I’m relying on my experience in saying that those who work in environments, or live in homes where personal savings for retirement is encouraged, and where saving for a home deposit is encouraged will develop a general sense of stability and contentment with staying in New Zealand, or returning to New Zealand after a 1 – 2 year break.
Clearly some employers are not interested in their employees’ warm fuzzy feelings about living in New Zealand. So here is the Government’s concession.
- Employers with employees contributing to KiwiSaver (or complying funds) will receive a matching employer tax credit (a maximum of $20 per week = $1,042.86 per annum) for each employee.
Which ever way you look at it, Employer Contributions to KiwiSaver make tax benefits for employees. For the employers’ troubles, he or she has a tax rebate matched dollar for dollar for the first $20 per week. That means that Employer contributions to every employee earning less than $104,000 per year including overtime, bonuses and commissions is fully subsidised with a Government rebate from April 1, 2008 to 31 March 2009. If you’re self employed, and you can get into PAYE, take advantage of paying 2 or more percent of your income as tax free employer KiwiSaver contributions.
Visit this site again, for more opinions and facts and instructions on how to maximise your KiwiSaver and what to do as an employer. If you are already signed up for KiwiSaver, but want to choose a supplier, call me. If you are not signed up for KiwiSaver, call me. I can help you to do this over the phone, in person – if in Canterbury, or whatever suits you. If you are an employer and want someone to talk to staff about KiwiSaver, employer contributions, etc, call me on 03 323 4241. My main website is
www.liferisk.co.nz
1) Center for Strategic and International Studies, (2002) = Richard Jackson, The Global Retirement Crisis – The Threat to World Stability and What to Do About It, On line (http:/info.worldbank.org/etools/docs/library/158438/ppfm2004/pdf/global_retirement.pdf,) p55
2) http://www.chapmantripp.com/resource_library/published_article.asp?id=4739
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