Diana Clement: Stats make case for saving plans

Private superannuation isn't the stuff of dinner-party discussions. Yet without it or an alternative savings scheme, many Kiwis are likely to spend their twilight years more concerned about the cost of filling their shopping trolley than planning their next cruise.

The fact that only 3 per cent of the over-65s have an annual income of more than $50,000 indicates just how dire New Zealand's retirement savings is, says Statistics New Zealand. Most retired people have little income over state superannuation.

Warren Stephens, financial adviser at Argent, says his firm uses statistics to bring home to people the need for superannuation. "About 12 per cent to 13 per cent of the population is retired and this will double by 2040," says Stephens.

Unlike Stephens, not all financial planners recommend private superannuation to clients.

In Australia, superannuation is compulsory and the UK Government offers tax breaks that mean the Government tops up your pension superannuation contributions by 22 per cent or 40 per cent, depending on your tax rate. It's not so clear cut here.

"Superannuation is simply a marketing term in New Zealand," says Robert Oddy, director of International Financial Planning. He says New Zealanders are tying their money up in investments that are similar to managed funds, but without the flexibility. In some cases, superannuation funds may not perform as well as similar managed funds over the long term due to high costs.

Even those who aren't fans of the private superannuation industry accept the fact that certain people are suited to tying their money up so they can't get their hands on it.

"If [a client] has demonstrated good discipline, I would typically recommend a unit trust," says David Yates, financial planner at Integrate Financial Services. "Conversely, if they have a poor track record in this area, the superannuation option is often more appropriate."

Some clients will only commit to a savings programme if they can have access to the funds in an emergency, says Yates.

Alternatives to superannuation include simple managed funds, buying your own home, property investment or building equity through your business if you have one.

Fenton Peterken, financial planner at The Capricorn Group in Whangarei, says super funds are one option. "I also advise what other options there are available to grow a nest egg for retirement. These include growing a business or purchasing investment property."

Peterken adds: "I have many clients who have started investing in property. Even though at the moment the majority of these properties are generating a tax and cash loss, over the long term not only will these properties generate additional income but also tax-free capital gains."

If you do choose the private superannuation route, comparing trusts can be difficult, says Michael Littlewood, co-director of the Retirement Policy and Research Centre at Auckland University. It's important that the costs are low, the flexibility high and that the add-ons such as life insurance are good value.

The website Mastertrust.co.nz, recently taken over by the Association of Superannuation Funds of New Zealand, has some useful comparison tables, as does Fundsource.co.nz. It's important to make sure you're comparing like for like.

According to Fundsource, superannuation funds tend to be focused more towards conservative investments. The large majority of funds available are cash, fixed interest and conservative balanced funds.

This is one reason Lisa Dudson, financial planner at Acumen, doesn't generally recommend private superannuation funds to clients. If she can't beat the return on super funds for her clients, Dudson says she probably shouldn't be in business.

However, she can see mileage in employment-based superannuation funds - especially if the employer tops up employee contributions.

One of the arguments against private superannuation funds at present is that they are taxed at a rate of 33 per cent, which can be costly to someone whose marginal tax rate is 19 per cent. "If [an investor's] marginal tax rate is 39 per cent there may be some benefit in using a superannuation option," says Yates.

Roger Perry, general manager of savings and investment at AMP, says tax changes due to come into effect next year will see superannuation funds taxed at 19 per cent and 33 per cent depending on your marginal tax rate. This will still benefit taxpayers on the 39 per cent rate.

On the other hand, says Oddy, if the proposal to put a capital gains tax on investments outside of Australasia goes ahead, it will cut the returns on managed and superannuation funds that invest overseas, or in some cases skew the investment strategies of managers away from an international spread.

Oddy tends not to recommend private superannuation schemes to clients because, among other reasons, the small amounts of money being drip-fed into such schemes make them costly to administer.

Nor does Mike Newton, financial planner at Select Asset Management, favour private superannuation - although he would if the Government offered some sort of tax break or compulsion.

"Imagine you live in Australia and each month you get a statement from your super funds showing you how much you have saved in your name and in your account. How good do think that makes [you] feel when [you] have never been able to save before?"

But Littlewood argues that tax incentives merely mean all taxpayers including poor ones subsidise those who can afford to put money away for retirement.

Another downer for Newton is that superannuation funds can't be held in a family trust for asset protection purposes or to access lower marginal tax rates of beneficiaries.

Financial planners are split in their opinions about the KiwiSaver scheme - a non-compulsory savings scheme for employees set to begin next year. The scheme will involve employees automatically saving 4 per cent or 8 per cent of their income in superannuation type funds - offered by the funds management industry. The Government will jumpstart savers' accounts with a $1000 sweetener for all and more if you continue to save.

Perry says in 10 to 15 years when people have built up meaningful amounts of money in their KiwiSaver accounts, the experience will help build a better savings culture in this country.