New blog location.

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Key KiwiSaver and Tax Cut Changes

John Key and crew have rushed parliamentary process to bring into effect tax cuts and KiwiSaver changes before Christmas. They also rushed some changes to KiwiSaver, before the KiwiSaver member public knew what they were talking about. Here is a summary quote from the NZPA report linked above.

"The tax cuts will deliver $18 a week extra for a worker on the average wage when the first tranche kicks in next April." What is the National Average Wage they refer to? National Party referred to as being $52,000.

So if you've got an extra $18 per week on top of the $10 per week extra you had been delivered in October 2008, you're $28 per week better off. You may like to consider increasing your KiwSaver contributions, or taking up medical insurance, or doing a review of your finances by calling me.

But that is not all. "Incorporating Labour's October 1 tax cuts, the same worker would be $47 a week better off by April 2011, when the whole programme is in force." Quote from NZPA report linked above.

Definitely time for a review of your financial situation!

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KiwiSaver Changes.

This is a really brief summary, and it is based on the scanty information that is currently available.

In summary:

If you're in KiwiSaver and make no payments, or pay by direct debit, there is no change. You need do nothing.

If you're an employee, your matching contributions from the government are limited to 2% of your wages, or $1040 per year, which ever is lessor.

There may be ways around this limit on the $1040 government annual contributions for part time employees who have been in KiwiSaver for more than one year. That remains to be seen. (National obviously can't see it, otherwise they would have stopped this potential loop hole).

If you're an employer, listen up.

Currently the rules generally apply as:

Employee

4% from employee (after his / her tax)

Employer (matching employer tax credits from the government)

1% from your employer this year, unless you've got another arrangement.

2% from your employer next April (stays the same)

Changes include: no more increases to employer contributions from then on.

No more tax credit to the employer to subsidise the employer contributions due to the fact that these are now limited to 2%.

What has also changed is that employees (from the change effective date, April 1, 2009, I believe) can pay only 2% instead of 4% of their wages.

Employers pay a maximum of 2% compulsory contributions for staff.

BUT the biggest difference which was simply not flagged to anyone in any media statements, despite what the Hon Mr Bill English states is:

The superannuation tax to employer contributions to employee superannuation plans extends to KiwiSaver employer contributions over and above 2% of the annual cash salary.

This is a breaking news summary from Neil Smith of Life Risk Limited it is not a comprehensive report on the proposed KiwiSaver or Tax Cut changes from April 1, 2009. I will be blogging, and writing articles on my website on this topic. I am available to speak at work places on this topic, and call me if you have questions or wish to sign up for KiwiSaver, or have me as a resource at your work place in 2008 or 2009.

Why Is KiwiSaver Like Birthday Cake?

Why is KiwiSaver like birthday cake?

A Self Employed person, in the latter part of the working career asked a question about KiwiSaver. They wanted to know if they should continue to pay into KiwiSaver or pay off their recently increased mortgage first?

Neil Smith assures everyone that if you can't eat, there is no point in paying into KiwiSaver, but KiwiSaver is very different to putting money in the bank, and no one wants to miss out on something very special for lack of advice. So this article is written so you can learn about or be reminded of what makes KiwiSaver so special, even when the mortgage is barking at you.

I'll liken KiwiSaver to eating birthday cake. Birthday cake eaten at any other time of the year is simply not birthday cake! Its simply cake. In the same way, putting money into any other form of savings other than KiwiSaver, when you're between the ages of 18 and 65, is different to putting that money into KiwiSaver.

For starters, those that are in the latter part of their working time, there is limited time to take advantage of the offerings of KiwiSaver. There is only until age 65! Just like your birthday cake is only really special as your birthday cake for about one week.

So with KiwiSaver, it is a limited time offer. It stops being really special at age 65. Once you hit that age, your savings contributions don't get the special status that KiwiSaver provides them.

So what is that special status that a self employed person, or any other adult not already earning money from wages or salary has placed on their KiwiSaver contributions each month?

Its not the $1,000 kick start. That is a great incentive, but that is only given once.

Its the not even the low cost structure that KiwiSaver has, which is a huge benefit for anyone saving money for their future.

Its the $1040 "tax credit" or government gift of up to $1040 each for each person over 18, each year.

So my client asked me if I thought he should tame the barking mortgage, as he's increased his mortgage recently. Are they going to get better value for money placed in the KiwiSaver, or the mortgage?

If they reduce the mortgage balanced owed by $1 he saves 9% in interest each year. In 5 years time, he saved 45 cents. As the mortgage is new, it may take more than $1 to reduce the mortgage amount by $1.

If they increase the KiwiSaver contribution by $1, even when the markets are as up and down as they are right now, they have the assurance of another $1 at the end of the KiwiSaver year for each of the first $1040 per year!

So, if in 5 years time, they have saved $2 for the cost of $1, they are better off by at least 55 cents. But they will have earned some interest on that $2 as well, and so their return is going to be better.

Again, if $1 is paid off the mortgage, and 9 percent is the mortgage rate, 9 cents is saved each year for 5 years.

If $1 is contributed to KiwiSaver, at the end if that KiwiSaver year, another $1 is gifted by the Government so that they are earning interest on $2 for at least 4 of those years.

Therefore, in the interests of saving cash flow, the client might consider reducing their direct debit contributions to $87 per month, or less, depending on how much they have contributed from July 1 to today.

If they have contributed $1040 already this year, they should stop paying for 6 months if they want a break from paying.

For more articles on KiwiSaver head over to my main website.
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So, you're saving for a home deposit?

I was talking to a couple yesterday who were renting, and saving for a home deposit. They would need about $300,000 for their home loan. I explained that a $300,000 loan would cost them $500 per week to service. This did not excite them. They thought this was too expensive for them and they were wisely going to keep on saving for their home deposit for the next three years as they had a great house and affordable rent. But this statement really caught their attention...

I said "If I asked you today to save $170 per month for your retirement, you'd say, "No Neil we can't afford it". I am going to invite you to save for your house for the next three years, and the Government are going to pay you (as a couple) $170 per month for your retirement. How do you like that?" How many people know that told me they loved it?

Every New Zealand resident that has never owned a home can take advantage of this plan with KiwiSaver. You need to be resident, joined up for KiwiSaver 3 full years, and willing to wait 3 years. Then your own contributions and those of your employer can be drawn out for your first owner occupied home deposit. That is, your first house, that is owner occupied.

Call Neil Smith to find out more and to make sure your KiwiSaver plan is looked after an by Adviser with the answers. I also do work place presentations for businesses in and around Canterbury, New Zealand. A disclosure statement is available, upon request and free of charge.

The Age Old Crisis and What Has KiwiSaver Done About It?

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 13^th 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

A disclosure statement is available, upon request and free of charge

Compulsory Employer KiwiSaver Contributions Now Law.

The long awaited decision on compulsory contributions from employers for those contributing to KiwiSaver has been passed into law. It’s not been a popular clause with the National Party, nor with many employers, but it is here none the less. I will be posting articles on KiwiSaver and how it could benefit you and your family, and you and your business on this articles page.

A disclosure statement is available, upon request and free of charge