We are doomed, Mary. Bring on death and free us from all taxes!
IRD is neither good nor bad morally. It is just a collection agency. Successive governments including the local governments are the real evil - over-taxing just to recoup more from everywhere and nowhere (carbon tax) to cover their inefficiencies, poor financial stewardship and bad policy making. Hence, the Kaipara District Council rates revolt and the looming Auckland Council rates increases. Thanks.
I assume the thanks is for spleen-venting services. When I send you my bill, I'll be sure to add tax.
You're quite right about the Government's coffers benefiting from rising prices, and not just because higher prices produce more GST. As prices rise, wages tend to grow - usually a bit faster than prices. And as wages rise, income tax rises disproportionately, in what's called bracket creep.
Let's say Fred, who earns $47,000, gets a 3 per cent pay rise. His income grows to $48,410 and he will shift from the 17.5 per cent bracket to the 30 per cent bracket.
This isn't as alarming as it sounds. The cutoff is $48,000, and it's only income above that point - in this case $410 - that is taxed at the higher rate. But as the years go by, a bigger and bigger percentage of Fred's pay will be above $48,000. He might not be able to buy much more with his pay rises, because inflation has pushed up costs, but he still pays more tax. It's sneaky - but most governments do it and have always done it.
Beyond that, yes, we are hit by all sorts of taxes. But you're a bit heavy on the pessimism. For example, as a member of the newish Financial Markets Authority, I can't let you get away with saying there's less supervision of financial markets. The opposite is true, and you'll see the results of that in the months and years to come.
Adds FMA chief executive Sean Hughes, "No new taxes were imposed nor additional taxes raised to fund the FMA. The increase in budget from our predecessor is now funded from industry fees and levies - that, is user pays.
"Obviously the FMA wasn't around when the finance companies collapsed so it can't take the blame for that, either, but the obvious point is that regulation is not intended to prevent capital loss nor can it guarantee investment returns."
That last point is important. It's not the FMA's role to stop people from losing money in investments. The economy needs people to take financial risks. Otherwise, businesses couldn't start or grow.
However, the FMA is working on making it clearer to investors how much risk they are taking.
Tax morality
Last week you said, "... lawyers, accountants and financial advisers say, 'As long as nobody is actually breaking the letter of the law, it's our job to minimise the tax our clients pay'."
We don't know what Parliament's intention was, we only know the laws it writes. And even if we did, we have to follow the law exactly as written. You can't get off a charge by showing that the law you broke was not the intention of Parliament. So there are no "loopholes", just badly written laws that don't achieve the intention of the law-makers.
The tax laws have nothing to do with morality or "right behaviour", they simply reflect a political decision to take money off one person, to be given to another who the politicians of the day wish to favour.
Some tax activity is legal one day and illegal the next. This is quite different from laws against murder, etc, which has always been illegal and that won't change. "Natural law" one could call it, as compared to "artificial law" on taxes that changes all the time according to political advantage.
Of course this applies equally to benefits, but personally I draw a distinction between resisting being robbed, and robbing someone myself - though both would make me richer. So I do not have a family trust in which to hide assets so I can plead poverty and ask the state to pillage someone else to support me in my old age.
Ultimately each of us makes our own decision as to how we live our lives, and what behaviour is acceptable or not.
You seem to be saying that when clever professionals think up ways to reduce their clients' tax payments - breaking the spirit but not the letter of the law - they are just innocently complying. Pull the other one.
Usually it's obvious what Parliament's intention is in tax law. The tax-dodgers know perfectly well what they are doing. They even brag about it.
On the morality of taxation, basically tax is taken from those with the means to pay and used to provide services to everyone. If you're in a position to pay and receive the benefits of government, but you arrange your affairs so that you don't pay, I reckon by most people's standards that is immoral.
Cashing in funds
I will be able to obtain my KiwiSaver money in December this year, yet no one can tell me what I am able to do. Can I take it all out? Or can I take a weekly/monthly sum and keep paying in?
You can do whatever you like with the money - take out all or some or leave the lot in there. You can also put more in, although you will no longer receive tax credits or compulsory employer contributions.
Whether you can make weekly or monthly withdrawals depends on the provider. Ask, and if you don't like the answer, consider switching. Phone or email other providers that appeal to you. The speed and clarity of their responses will indicate whether you're likely to get good service from them in future.
If you decide to withdraw all your KiwiSaver money, the provider is supposed to tell you it is about to "terminate" your account. But some may just do it without telling you. You can't then rejoin KiwiSaver later, as you will be over 65.
Does that matter? KiwiSaver funds are a type of managed fund, and managed funds can work well in retirement. They give you much more diversification than you can do on your own, unless you are seriously wealthy. And somebody else manages the investments, keeping things simple for you.
The downside is the fees, which vary quite widely. So - assuming you want to stay in a managed fund - whether it should be your KiwiSaver fund depends partly on the fees. Many providers offer similar non-KiwiSaver funds, so you could ask about other options and their fees.
Another factor is that governments can change KiwiSaver rules. For example, they might prohibit lump sum withdrawals, making everyone take the money out gradually. I think that would be unfair, but governments have been unfair before. If that worries you, you could switch into a non-KiwiSaver managed fund.
For more thoughts on this topic, keep reading.
KiwiSaver path
I turn 70 in August, so was able to get into KiwiSaver at its inception. I will have contributed for the five years. At the time I joined I was self-employed and invested $100 a month of my own. I still do this even though both hubby and I are retired pensioners now. He was too old to join the scheme.
Should I take the money out, or leave it in - and should I keep putting in the $100 a month, or just leave it sitting there for a rainy day? We cashed up our rentals, and most of our investments apart from having kept one rental are just "ladder" fixed-interest investments, which do not earn over-much interest - but we know our money is "safe".
In your situation, continuing to contribute to KiwiSaver is simply transferring savings from one investment to another. Should you do that?
One advantage is that, if your KiwiSaver fund invests in shares, it gives you some exposure to the share-market. That's good, even in retirement, as shares are likely to grow faster than bonds and term deposits over long periods. Also, a share investment gives you some protection from unexpected inflation, as shares tend to grow with inflation.
Look on a share investment as money to fund your late retirement - perhaps from 85 or 90 onwards. When you get within 10 or 12 years of that age, you can gradually shift the money into high-quality bonds, which are less volatile.
Whenever you invest in shares, though, you need to be prepared for some ups and downs on the way. Plan not to panic when - not if but when - the value goes down. If it's a well diversified investment it will come back up again in due course.
Another consideration is whether you would be better off in a similar non-KiwiSaver fund, as discussed above.
By the way, you just made it into KiwiSaver, being a month or so off 65 when it started. Good on you! If you add up your total contributions and compare that with your fund total, I bet you're glad you joined.
There'll be more in this column about KiwiSaver in retirement over the next few weeks.
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.
