Call for KiwiSaver shake up

Retirement Commissioner Diane Maxwell says the proposals are an excellent contribution to the debate. Photo / David White

Financial Services Council wants to lift contributions to 7% and reduce the tax rate.

The Retirement Commissioner says an industry proposal to shake up KiwiSaver will be taken into account as part of its final recommendations to the Government but others are cautious about "tinkering" with the savings scheme.

The Financial Services Council, whose members manage over $80 billion of assets, yesterday announced a proposal to supersize people's retirement savings by cutting the annual KiwiSaver subsidy and using the money to reduce investment tax rates.

Council chief executive Peter Neilson said research had revealed most New Zealanders considered a comfortable retirement to require about double New Zealand Superannuation - now $357 a week for someone living alone.

To get that under the current KiwiSaver arrangement people would need to save 10 per cent of their income for 40 years from the age of 25.

Neilson said it was too big an ask for many people to save 10 per cent of their annual income from day one.

Instead he proposes increasing contributions to 7 per cent, changing the default KiwiSaver scheme setting from conservative to either balanced or growth and dropping the tax rates on KiwiSaver investment funds.

Under the proposal the marginal tax rates would be cut to 4.3 per cent, 8 per cent and 15 per cent down from the current levels of 10.5 per cent, 17.5 per cent and 28 per cent.

The tax rate cuts would be paid for by removing the annual subsidy of up to $521 paid in when savers put in at least $1042 a year.

Neilson said reducing the tax rate on KiwiSaver would bring it into line with other investments.

Retirement Commissioner Diane Maxwell, who last week released her review of retirement income policy, said the proposals were an "excellent contribution" to the debate.

"We would all agree these issues around taxation need to be tabled and debated. We will review it in depth in looking and thinking about our final document."

But Michael Littlewood, co-director at the Retirement Policy and Research Centre, questioned the use of tax breaks for KiwiSaver.

"We used to have tax breaks until 1990. The problem was the tax regime allowed leakage, favoured the rich and didn't noticeably add to savings."

He said evidence from around the world showed tax incentives did not increase savings. He also questioned the need for more change.

"I would be very reluctant to see KiwiSaver Mark 5 before we figure out whether it is working now."

Binu Paul, principal of Tickyourboxes, a KiwiSaver weblog, was also reluctant to see more change. "The less tinkering we have with the scheme the more confidence people can have in it."

The Financial Services Council is also proposing a minimum starting point of 1 per cent KiwiSaver contributions and encouraging people to buy a capital guarantee to ensure they have a certain amount of money when they retire.

Stephanie Payet, a visiting OECD pensions policy expert who was at the council's conference, said capital guarantees could alleviate the risks involved with retirement savings but it came at a cost which would need to be covered by increased contribution rates.

Payet said capital guarantees could be cheap if a person saved for 40 years, did not change their investment strategy and did not change provider.