KEY POINTS:
The vast majority of Kiwis will retire poor. There's no two ways about it. The state superannuation currently pays $13,722 for a single person or $21,112 for a married couple. That's not a lot to live on.
"It's a pittance," says economist Gareth Morgan, who recently wrote a
book called Pension Panic. Only 3 per cent of the over 65s have an annual income of more than $50,000 according to Statistics New Zealand.
We're not saving for our retirement and the number of retired people is expected to double by about 2040 and the number of employed people supporting each oldie will have halved.
In countries such as Australia, the UK, US, Sweden and Italy people put a far greater proportion of their discretionary spending money into savings.
In Australia workers put 9 per cent of gross salary into compulsory superannuation.
In Germany, workers and employers between them contribute about 20 per cent of salary, while the state adds another 10 per cent, to produce a final salary pension that can be up to 70 per cent of earnings.
New Zealand's response to the savings problem is, for now at least, KiwiSaver - an incentive saving scheme which kicks in on July 1, next year. Whether it's going to work well is up for debate. The reality is that it's with us and even a change of government is unlikely to see it go now - although it could be altered.
How it will work, in a nutshell, is that you will be automatically enrolled in KiwiSaver when you start a new job - although you will have the right to opt out. You can choose either 4 per cent or 8 per cent of your gross salary be contributed to the account. Employers can match contributions up to 4 per cent with the money going into your account tax free.
The Government will pay in $1000 to get the account started and savers who continue to contribute can get $1000 a year subsidy for the maximum of five years for a first home purchase. The minimum subsidy is $3000 after three years up to $5000 for five years' saving.
A couple can accrue a $10,000 subsidy providing both people are earning less than a certain threshold that is yet to be set.
An individual's KiwiSaver money will be invested in share-based funds provided by the private sector, but vetted by the Government. It's possible to change providers but you can't do it more than once a year.
Within each provider's fund you will be able to chop and change the underlying investments. If you don't choose a provider your money will be invested in a default fund which, says Jonathan Falloon of AMP, will include a conservative (safe) investment option.
KiwiSaver fees will be subsidised by the Government, which should result in investments growing at a slightly faster rate than other equivalent managed fund or private superannuation investments.
Existing employees can opt in to the scheme as can anyone who has some income, including people who are self-employed or have minimal income through part-time work such as mothers, and retired people. In this case you will make your payments direct to the Inland Revenue Department.
Under current rules children can join KiwiSaver providing they have an income - even if it's just $8 a week delivering the local newspaper - or if they're paid wages or salary by a family business or trust. A spokeswoman for Finance Minister Michael Cullen's office said that children would qualify for the initial $1000 deposit from the Government and the first home subsidy. "The entitlement for the housing subsidy and the $1000 entry subsidy is based on continuity of contribution, not particular amounts of money," she said.
KiwiSaver has come in for some political flak and it may not be the perfect answer to our lack of household savings. But, as Morgan says in his book, it is one of several pillars of retirement provision, including property, shares, bonds and the state pension, which individuals should plan to retire on.
Some financial professionals argue that most people will open accounts to take the initial $1000 or that and the home deposit subsidy and run. But there are other reasons to join. Some of the other plus points for the KiwiSaver are: * Any money your employer contributes up to 4 per cent of your gross salary is deposited tax free.
* If you are paid a salary by a business you own, your business will be able to contribute the tax-free 4 per cent to a KiwiSaver account. This will only work if you are "employed by the company" or in partnership.
* Even part-time workers and children with minimal income qualify.
* Earnings on your money within the fund will pay a maximum of 33 per cent tax even if you're a 39 per cent taxpayer.
* You will be able to divert 50 per cent of your contributions into paying off your mortgage if the scheme you have joined allows that.
* It could be psychologically beneficial in getting people to save regularly - especially young people.
Falloon says the 4 per cent tax-free employer contribution is a real incentive for employees. Even if you can't convince your employer to start in effect paying you 4 per cent more, you might want to take a salary sacrifice of 4 per cent in order to get the tax benefits. Someone earning $100,000 a year would have paid $1560 tax on that $4000. By having it paid into KiwiSaver they're saving a significant amount of tax.
One of the beauties of the KiwiSaver scheme is that you can take your account with you when you move employers - unlike some traditional employer superannuation schemes. You may well be able to negotiate with your new employer to include the 4 per cent employer contribution in it.
On the downside, you can't withdraw the money until you're 65 years of age unless you:
* die (your estate can collect)
* suffer significant financial hardship or serious illness
* emigrate
* use the funds you've saved to buy your first home.
You will however be able to apply to the IRD to take a payment holiday after 12 months. Michael Littlewood of the Retirement Policy and Research Centre at the University of Auckland's business school said unless your employer was contributing tax-free or you wanted the first home subsidy then it made sense to open KiwiSaver accounts, take the $1000 Government sweetener, pay in for a year and then take a five-year payment holiday.
In Australia, superannuation is compulsory. New Zealanders, however, resoundingly rejected a compulsory super scheme in 1997, with more than 90 per cent saying "no" in a national referendum.
Compulsory workplace superannuation isn't always the answer to the problem of retirement savings, says Morgan. Since Australia set up its compulsory superannuation scheme in 1985, the country's household savings rate has fallen steadily, says Morgan.
The Government believes about 25 per cent of the national workforce will join the KiwiSaver scheme.
There's a website called Kiwisaver.govt.nz. It has a calculator which links in to the Sorted.org.nz website where you can prepare a retirement plan and learn more.
