KEY POINTS:
Accountant Hamish Edwards offers some advice about what the KiwiSaver means.
Question: I've heard a lot about the KiwiSaver scheme - what does it mean for me?
Answer: KiwiSaver, New Zealand's new superannuation scheme, is set to commence from July 1, 2007, when every employee starting a new job will be automatically enrolled in the scheme. KiwiSaver is not compulsory and the employee has the first eight weeks in their job to opt out.
Existing employees and the self-employed can also choose to opt in. As an employee, your KiwiSaver contribution is deducted from your salary or wages each pay day for investment through your KiwiSaver account. You can choose to save at a rate of either 4 per cent, or 8 per cent of your total pay before tax.
KiwiSaver enables employers to make contributions to employee savings at any amount they wish. These employer contributions are exempt from the Superannuation Scheme Contribution Withholding Tax (SSCWT), which is currently 33 per cent of the gross employer contribution. However, tax-free contributions are capped at either the employees contribution or 4 per cent of their before-tax pay, whichever is less.
Contributions under KiwiSaver are locked into the scheme until the employee reaches the retirement age of 65 years. Exceptions to this include a one-time withdrawal to assist with the purchase of a first home, financial hardship, death or permanent emigration. The Government will contribute $1,000 on the commencement of an account, and will provide up to $5,000 if an employee stays in for five years and is purchasing a first home.
Question: So how good is KiwiSaver as a superannuation scheme?
Answer: KiwiSaver is a step in the right direction towards ensuring New Zealanders save for retirement, but it is really targeted to help first home buyers, so does not do enough. Approved investment schemes under KiwiSaver will probably be low risk and not specific to the needs of the employees saving.
Question: I'm already in a workplace super scheme. What impact will KiwiSaver have?
Answer: As an employee, if you already have a workplace scheme then you will need to check whether it is an approved employer-provided superannuation scheme, and whether it will therefore enjoy similar tax benefits to KiwiSaver.
As an employer with an existing workplace superannuation scheme, consideration should be given to applying to have the scheme approved by the Government Actuary to gain exemption so that the current scheme can be viewed as an alternative to KiwiSaver.
Both KiwiSaver providers and approved employer provided superannuation schemes will benefit from the exemptions from SSCWT.
Question: Won't it be best to get the $1000, pay in for a year, and then set up my own super scheme?
Answer: This would certainly defeat the intention of KiwiSaver legislation, and would also mean the benefits of tax-free employer contributions and the option to split contributions to pay mortgages would be foregone.
You need to consider the after tax and after fees returns for the KiwiSaver scheme and the alternative investment of the funds. If you are confident that greater net returns can be obtained elsewhere without greater risk, then this is a viable option.
Question: Will it become compulsory?
Answer: Whilst the Government states that it does not intend to turn KiwiSaver into a compulsory savings vehicle similar to the Australian superannuation scheme, there is certainly the ability to do so without a fundamental reworking of the current structures.
Question: I'm the boss of a small company what will I have to do?
Answer: If you are an employer then you must provide an information pack on KiwiSaver to new employees when they start.
If a new employee chooses to remain opted in to the KiwiSaver scheme then their payments will be deducted through the current PAYE processes with IRD.
If an employer wishes to opt out of KiwiSaver they must apply to the Government Actuary and offer an alternative registered superannuation plan to their employees.
In providing an alternative superannuation scheme for your employees, keep in mind that a good scheme will have the flexibility to meet a range of different requirements:A superannuation scheme should enable employees to continue with the same retirement savings plan even if they change employers.
A superannuation scheme should enable employees to have individual investment choices and the ability to choose a strategy that best suits their needs.Employees and employers should be able to make contributions to a superannuation scheme.The employer should be able to be part of the superannuation scheme and have their own plan.
Finally, employees and employers should each take advice and plan for what they are going to do when July 1 rolls around. I suggest speaking to a chartered accountant and financial planner so that they can help with the development of a superannuation plan.
