KEY POINTS:
KiwiSaver investors will pay more tax on their investment earnings than the incentives given to them by the Government unless the rates are lowered, an investment consultancy firm has warned.
Mercer, which advises institutional investors and also runs KiwiSaver funds, said under the current model the incentives to join KiwiSaver would be wiped out over the lifetime of a saver as they would pay more tax on investment earnings.
Those who join KiwiSaver get a $1000 kick-start when they first sign-up as well as a contribution of up to $1040 per year from the Government.
Employers must also chip in 1 per cent this year, increasing by a further 1 per cent per year until 2011 when it would be capped at 4 per cent under Labour. If National is elected it has said the employer contribution would be capped at 2 per cent.
Paul Newfield, Mercer's head of retirement, risk and finance said KiwiSaver was a good start but the model needed to be improved to encourage long-term savings.
"We need a 'break even' tax rate in New Zealand - an average rate at which the total investment tax paid by an individual over their life time equates to the various benefits paid by the Government - not a tax rate that ultimately penalises people for accruing and then using, their retirement savings."
Newfield said that break even point could be reached at a tax level of around 12.5 per cent.
Under the present system he said the average investment tax rate for a growth or balanced investment fund was 20 per cent while a conservative option was around 26 per cent.
