Tax wipes out KiwiSaver lure

KIRK HARGREAVES/The Press

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Tax paid on KiwiSaver nest eggs will dwarf the value of government incentives offered to join the scheme, under current tax rules, says consulting and investment firm Mercer.

Research by Mercer shows incentives – including the $1000 kick-start, fee subsidies and tax credits – are essentially wiped out over an individual's lifetime as they will pay more tax on investment earnings in the long run.

Principal Paul Newfield says some aspects of the current tax regime could be maintained, but an investment portfolio, regardless of asset class, should ideally have an average tax rate in the "break-even" range to support retirement saving.

"We need a break-even tax rate in New Zealand, not a tax rate that ultimately penalises people for accruing, and then using, their retirement savings," said Mr Newfield, Mercer's head of retirement and risk business.

Under the existing regime, the average rate for a growth or balanced investment option is 20 percent, and 26 percent for a conservative option. Based on today's average wage of $47,324, the break-even rate should be 11.5 percent and 15 percent respectively, Mr Newfield said.

"Only a small portion of a person's retirement capital and investment earnings, hence tax, accrue to the age 65, and therefore, as a minimum the tax rate on investment earnings post age 65 should be substantially reduced," he said.

Preferential tax on investment earnings inside long-term savings vehicles is common in many countries, including Australia and the United States. While unavailable here, other assets, such as property, are taxed preferentially – a major factor influencing growth of property investments, Mr Newfield said.

- © Fairfax NZ News