Mary Holm: KiwiSaver gripes a bit extreme

One reader thinks the attractiveness of the KiwiSaver scheme has been eroded. Photo / APN

I bought into the concept of KiwiSaver and joined myself and family from day one. However, we must now acknowledge the attractiveness of the scheme has been eroded, and it must now be considered a marginal investment option. Since KiwiSaver's introduction we have seen a number of initiatives that have not only removed the gloss but eaten into the bedrock of the scheme itself:

* Removal of the fee subsidy.

* Reduction in employer contribution.

* Employees effectively paying the employer contribution through salary sacrifice (try to get that done in Australia).

* Halving of the annual tax credit.

* Taxing the employer contribution.

The end result is the scheme is now effectively self-funded and no different from any other unit trust investment (with the corresponding poor performances to match).

Your list of changes is a bit wobbly in three places:

* The employer contribution hasn't been reduced. It started at 1 per cent of pay, rose to 2 per cent, and was scheduled to rise to 3 and then 4 per cent. But the last two rises were cancelled, so we stayed at 2 per cent. In April 2013, the employer contribution rises to 3 per cent.

* In most cases, employers do pay employer contributions. To keep things simple, we'll regard that as the case in this Q&A. There's more on the other situation below.

* Although employer contributions will be taxed from April 1 this year, the increase to 3 per cent next year means that employer contributions will grow despite the tax. For someone earning $30,000 now, the current employer contribution is $600, and from April 2013 it will be $743. For someone on $50,000, it rises from $1000 now to $1238. And for someone on $100,000, it rises from $2000 now to $2010.

Still, KiwiSaver is certainly not as good as it used to be. What's more, all the changes have made it hard to keep up with what's going on.

Have the changes eaten into the bedrock? That's a bit extreme. Because of the Government's $1000 kick-start, KiwiSaver is still almost impossible to beat in your first year in the scheme. Everyone who's eligible is still mad not to join and contribute for at least the first year.

Even after the first year, every low- or middle-income employee will find from April 2013 that their contributions are at least doubled by inputs from the boss and the Government (see table). Those on higher incomes will also get a big boost. The scheme is a long way from self-funding.

Double the inputs means double the amount in retirement. Even if your KiwiSaver fund performs poorly - and some certainly have lately, but so have most other investments - that doubling makes quite a difference.

Non-employees will find their contributions boosted by 50 per cent, which is also nothing to sneeze at.

Nonetheless, for people with mortgages it's no longer so clear that, after the first year in KiwiSaver, it's better to keep contributing as opposed to taking a contributions holiday and putting their savings into extra mortgage payments. It depends on mortgage interest rates and KiwiSaver returns - the latter unknowable in advance.

Non-employees and employees effectively paying their own employer contributions would probably do better concentrating on mortgage repayment. But other employees should probably continue with KiwiSaver contributions.

For more on this, see this column two weeks ago.

Clearly you are disillusioned about KiwiSaver, and that's a pity. Perhaps you could look at it this way: you were smart to get in from the start.

If you no longer want to participate, just stop contributing and leave your accounts to grow over the years. At least you know you were in for the great years.

Tax credit

If most KiwiSaver employer contributions after April 1, 2012 are taxed at 30 per cent, in the example of someone on $60,000 a year, the employer will contribute 3 per cent from April 2013, which is $1800. Of this, $540 will be tax paid to IRD, and $1260 will become a KiwiSaver contribution.

From the $540 tax, the Government (taxpayer) contributes $521 as the tax credit.

Am I correct in thinking that the only government (taxpayer) KiwiSaver contribution then is the $1000 kick-start, and that the contributors and maybe their employers will be fully funding their own KiwiSaver investment?

Clearly the Government (taxpayer) will contribute part of the misnamed "tax credit" for low income earners, and all for those who don't have employer contributions. But high income earners will pay much more tax on their employer contributions than the government contribution.

Firstly, most employer contributions will be taxed at considerably less than 30 per cent. The rates are based on the total of your taxable income plus your KiwiSaver employer contribution. They are as follows:

* If the total is less than $16,800, the tax rate is 10.5 per cent.

* If the total is between $16,801 and $57,600, the tax rate is 17.5 per cent.

* If the total is between $57,601 and $84,000, the tax rate is 30 per cent.

* If the total is more than $84,000, the tax rate is 33 per cent.

Your calculations are correct for someone on $60,000. But your thinking isn't quite right.

After taxation starts, employer contributions will be smaller but they will still be gravy for most employees - money they wouldn't have had if they weren't in KiwiSaver.

What about those whose employer contributions are taken out of their pay? They are merely switching from having a small portion of their pay - their employer contributions - untaxed to having the whole lot taxed, just as it would be if they weren't in KiwiSaver.

More money is going into government coffers, and less into employees' KiwiSaver accounts. Members of KiwiSaver have lost one of their perks.

However, the fact remains that everyone on any income who contributes to KiwiSaver will still get a tax credit - making them up to $521 a year better off than non-KiwiSavers.

That money comes from all taxpayers. KiwiSaver will still cost the government plenty.

Tax disadvantage?

Just reading your reply last week to the writer who has their KiwiSaver employer contributions taken out of their pay, and what will happen on April 1.

They will face the same taxation disadvantage as all other KiwiSaver members with employee contributions at that date. But what happens to them on April 1 next year when compulsory employer contributions and minimum employee contributions go to 3 per cent?

This will directly disadvantage KiwiSavers whose employer contributions come out of their pay instead of being on top of their pay. Any thoughts?

People in that situation will see their total contributions rising from 4 to 6 per cent of their pay.

Bear in mind, though, that the money is still theirs. It's just that it's tied up, in most cases until retirement. But it will earn returns in the meantime, and many people will be quite happy with that.

Those who aren't can take a contributions holiday - perhaps continuing to put in enough to get the maximum tax credit, as outlined last week.

One more point for those up in arms about employer contributions coming out of employee pay. The self-employed and non-employees also make all their own KiwiSaver contributions, and they've never had a tax break on any of those contributions.

Name and shame

People are interested in who are the "best employers". I think there is public value in revealing who are "stingy employers". And I disagree it is mainly larger employers who take their KiwiSaver employer contributions out of people's pay.

I also disagree that there is an inverse relationship with pay rises. Instead, a boss who is stingy on KiwiSaver contributions is likely to also be stingy on pay rises. Name and shame them, I say.

An example: XYZ Co insists that KiwiSaver contributions come out of salary, and has a high turnover of staff who leave for higher paying positions at other companies.

Naming and shaming is one consideration. Avoiding libel lawsuits is another - hence my renaming the company. Anyway, it might be more effective incognito. More than one company is likely to think, "That might be us", and hopefully consider how much more it costs to keep replacing staff than to treat their current lot well.

That doesn't mean, though, that every company that takes KiwiSaver employer contributions out of pay is a bad employer. There's merit to the argument that such a policy is fairer to employees who don't join KiwiSaver.

My information last week, that it's mostly larger employers that do that, came from people who work in the employee benefits area. But they might not know much about small employers. Does anyone know of any research on this?

As for pay rises, who knows? Surely most employers would realise they won't keep good employees if everything about their pay packages is unattractive. But there are always some who don't think these things through - or who run businesses desperately trying to stay alive.

Brief plug

I was wondering if I should send you some copies of my little book for you to send to finance ministers in countries needing a bit of assistance on the financial front - especially those in Europe. Perhaps one or two copies to our own fiscally fraught fellows at the Beehive?

The little book continues to entertain, amuse and inform the many around the world who read How To Live Well On A Small Income. It does "hit the nail on the head" with all that spend the minutes required to read it, and some are asking when the sequel will be published.

I was going to send one to Mr Obama but didn't think he'd have the time to read it, and his advisers would probably steer him away from such audacious thinking and subversive writings.

Before I'm flooded with requests for a similar plug from other authors, let's just say this book is a bit different.

It consists of two chapters. The first one reads, "Eliminate Debt!", and then defines those two words. The second reads, "Reduce Outgoings!", and defines those words.

There's also a brief introduction, author's note, reviews and so on, but basically it's just four words - which you have given me permission to quote here.

The advice is spot on - to some extent even for governments.

My one reservation is that some borrowing, such as mortgages and business loans, can be good if used wisely. Same goes for government borrowing.

Still, well put - and your brevity is admirable.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.