Diana Clement: We have the attitude but not the savings

Kiwis have some of the world's best savings attitudes, a worldwide study by superannuation provider AXA has found.

Some 81 per cent of working people felt individuals should take charge in providing their own pension.

But a significant number - 77 per cent of workers and 86 per cent of retirees - felt the state should also contribute.

The study showed 69 per cent of Kiwis have savings targeted at their retirement, 56 per cent have life insurance policies, 53 per cent real estate, 42 per cent pension savings schemes, 37 per cent other savings schemes, 36 per cent employer scheme and 6 per cent shares.

New Zealand is third out of 15 countries for its positive attitudes towards retirement, and just over a third of working people (36 per cent) expect their children to give them financial aid in retirement.

Kiwis lead the world in their use of real estate as an investment vehicle for retirement income.

They are more likely to have wills than people from most countries - 69 per cent of workers and 96 per cent of retirees say they have prepared wills.

But why bother tying your money up in a superannuation scheme that you can't get your hands on until you're 55? This is the question I asked myself when I first came back from my OE and found that the Government dolled out virtually no incentives to save for retirement.

Tim Jenkins, head of Mercer New Zealand, a human resources consulting company, says in Australia, the effective tax rate on superannuation contributions is 28 per cent, compared with up to 39 per cent here for a higher-rate taxpayer.

In Britain, pension (superannuation) contributions come from gross income, which means that for every 78p a lower-rate taxpayer contributes to his or her pension, the Government adds another 22p.

Here we get diddly squat in terms of tax breaks. Granted that anyone who opens a KiwiSaver account, announced in the Budget, gets $1000 gratis from the Government as a one-off deposit. But beyond that, there's nothing.

Having said that, there certainly is a case to save for your retirement, unless you want to live on the $13,000 of New Zealand Superannuation as a single person or nearly $19,000 for a couple.

Financial planner Lisa Dudson told an audience at the recent Property & Investment Expo in Auckland that just 1 per cent of us will retire on the equivalent of $50,000 a year. That's a sobering thought. Even so, why pay into a super fund when other forms of investment are more flexible? Superannuation is a long-term investment designed to provide an income in retirement. There are four main types:

* New Zealand Superannuation - available to all and funded through taxes.

* Work-based superannuation schemes, including the state-sector scheme.

* Private superannuation schemes.

* KiwiSaver, the account announced by the Government where wage and salary earners can voluntarily pay 4 per cent or 8 per cent of their net income.

For the work-based, private and KiwiSaver schemes your contributions are invested in pooled funds - little different from managed funds and often provided by the same companies, such as AMP and AXA.

Typically, your money is locked up until 65, but you can access it if you can prove hardship or, in the case of workplace schemes, when you leave your employer.

So why bother? Jenkins says that when it comes to work-based schemes, there are tax advantages to be had from the "salary sacrifice" rules. How this works is you reduce their pre-tax salary by having a percentage paid into the superannuation scheme as employer contributions and taxed at 33 per cent. If you're on the 39 per cent marginal tax rate then this is a saving.

Someone earning $100,000 a year who made a net contribution of $26,800 using this method would save $2399 in tax. The downside is that your money is tied up.

The figure is small compared with the sizeable contributions Australians and Britons see from their Governments.

But as Robert Oddy of International Financial Planners points out, the employer's contributions to superannuation is money that you wouldn't have seen otherwise and it's difficult to look a gift-horse in the mouth.

It's harder to see a reason to invest in private superannuation schemes. But Roger Perry, general manager of savings and investments at AMP, says those people who are unable to keep their fingers off their retirement pot may like the idea of their funds being tied up.

What's more, until 2007, there are some tax incentives for diversified balanced superannuation funds, which escape capital gains tax faced by managed funds. Also, in some cases, investors in superannuation schemes pay lower entry charges and ongoing management fees because your money is there for the long term.

Growth on money in superannuation schemes is subject to capital gains tax (CGT) of 33 per cent, making direct sharemarket investments and passive funds, which escape CGT, such as NZX's Mozy fund, look a lot more attractive. But from April 2007, the Government is removing that tax on New Zealand investments, which should enable them to grow more quickly.

However, growth on funds invested overseas by your superannuation/KiwiSaver provider will still be stung with CGT. Come 2007, superannuation fund managers will no doubt change their asset allocations. But no sensible manager would move its entire fund into New Zealand just to avoid taxes.

The reality is that to retire on the income you're accustomed to requires a reasonably large lump sum come 65.

According to the Quick Retirement Calculator on the Retirement Commissioner's website, a single 40-year-old man earning $50,000 and wanting retirement income equalling 70 per cent of his present income would have a $13,739 net shortfall each year. This would require a lump sum of $216,6233 invested to ensure sufficient income.

Retirement Commissioner Diana Crossan says that equates to $563 saved each and every month for the next 25 years.

Using the same calculations, a couple would need a lump sum of $233,118, or monthly savings of $606 for 25 years.

Unfortunately for most people, what Crossan calls the "retirement panic" sets in about age 45. Had the same single man begun saving at 20, the monthly figure would have been $203.

Property investors who started four or five years ago and built up even a handful of rental properties in their portfolio will have, in most cases, easily surpassed the savings they need for retirement in the form of equity in their properties.

But they timed the market - cashing in on the phenomenal rises in recent years. Someone starting today is unlikely to see their capital rise at such a great rate and may even experience falls.

Property, superannuation schemes, the KiwiSaver account and traditional whole-of-life or endowment policies aren't the only way to fund retirement.

The commission is flexible - Crossan says there are many valid financial routes to retirement. Some of the common ones are:

* Building up a business and living off the sale proceeds.

* Investing in equities, bonds, fixed-interest and other main-stream investments.

* Investing in your children's education, which is popular in Pacific Island and other cultures.

* Spending on gaining qualifications to get a better job and improve your ability to build up savings.

Oddy, who is no great fan of private superannuation schemes, recommends that his clients save into cash accounts and every few months invest the accumulated money in a variety of investments such as equities, bonds and listed property funds.

A relatively new method of funding retirement, which, if used carefully, can be successful is an equity release mortgage, where a retired person takes a "lifetime loan" on the equity of his or her property. Interest is charged against the value of the property when it is sold (usually after the death of the owner).