There remains no real incentive for clients to direct extra contributions into KiwiSaver, so long as New Zealand is still a global outlier in its choice of tax structure around retirement savings, according to one financial advisory firm leader.
With the government in the early stages of considering what the future of KiwiSaver looks like, and whether that means higher minimum contribution rates, tax seems to be the elephant in the room few are talking about, says Become Wealth Chief Executive Joseph Darby.
“When you're at peak earning capacity, you're getting taxed at 33% and 39% and then the investment returns are getting hammered, that's the 28%, so you're kind of stunting the growth.”
“I think that’s a bit of travesty in some ways.”
New Zealand’s TTE (Taxed, Taxed, Exempt) structure around KiwiSaver, where contributions are pulled from taxed income, investment earnings are taxed, and withdrawals at retirement are generally tax-free, differs from the likes of the UK, US, Canada and to a large degree, Australia, where retirement savings are EET (Exempt, Exempt, Taxed) or at least have significant tax advantages.
Joseph Darby says KiwiSaver needs an overhaul, and as part of the process, the government should consider reversing the tax structure to make it more comparable with the international standard.
“I mean, what's the tax benefit? $521 a year? Most people, over a lifetime, that's going to add up to nothing. It's not going to make any material difference.”
The lack of a tax-exempt threshold for contributions has an effect on the nature of advice the firm offers clients.
“If you won a million bucks today, would you put it in KiwiSaver? No, because it’s illiquid and you don’t get a decent premium for that illiquidity.”
“In other countries, you see a financial advisor, they'll always say, you max out your retirement accounts first and then start looking at something else, whereas we'll just say, look at, in most cases, somewhere else that's actually liquid that you can get if you want to start a business or, buy another property, or buy a bach, or do something else when life changes.”
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