Article

KiwiSaver – flexibility, suspensions, and those over 65

Tax Alert - June 2019

By James Arbuthnott

The ongoing tinkering with KiwiSaver continues, with this year seeing three main (and a couple of related) changes coming into effect. These changes are largely the result of recommendations made by the Retirement Commissioner in late 2016.

Firstly, as of 1 April 2019, a KiwiSaver member can now choose to contribute at additional rates of 6% or 10%. This is intended to give KiwiSavers more flexibility and control over their saving, and provide an additional step between the 3%, 4% and 8% rate options as that gap was a potential impediment to KiwiSavers lifting their contributions from the 4% option. That said, it’s also clear that even greater flexibility in the contribution rates is not currently on the cards given the need to balance simplicity and administrative costs with flexibility for KiwiSaver members.

A second change is the result of concern that people took the ‘holiday’ part of a contributions holiday a little too seriously, and positively. So, in an effort to put a slightly less positive spin on it, a contributions holiday is now known as a ‘savings suspension’.

Not only that, but those availing themselves of the savings suspension will now have to consider that choice more regularly. That is, while the suspension choice could previously last for up to five years, the maximum period is now just one year (although the ability to continue the suspension indefinitely still exists, it will just have to be actively renewed each year).

On the subject of name changes, don’t expect to see a ‘member tax credit’ in the future; rather, it will be described as a ‘Government contribution’, which is intended to improve KiwiSavers’ understanding of this particular KiwiSaver benefit.

The final significant change reflects the fact that many people over 65 are still in paid employment and that life expectancy is well beyond 65 and we therefore need continued retirement savings. Accordingly, with effect from 1 July 2019, the Government has seen fit to allow those over 65 to join KiwiSaver. This is seen as one way for those people to access managed funds that, theoretically, have a lower cost. That said, an over-65 KiwiSaver who is still in paid employment will continue to be ineligible to receive any compulsory employer contributions or Government contributions.

Given the above change, the requirement for those who joined KiwiSaver after the age of 60 to leave their funds in KiwiSaver for at least five years (i.e., the lock-in period) will generally be removed from 1 July. There is also a transitional rule for those who joined after the age of 60 and whose lock-in period extends beyond 31 March 2020 to exit the lock-in period if they are at least 65.

Despite these changes, don’t expect it to end here. In fact, Officials noted that KiwiSaver needs to “remain fit for purpose and reflect current Government priorities”, which suggests continual change. In that regard, the Financial Markets Authority (FMA) has regularly raised the matter of fee levels, and the asset allocations for those in default schemes often comes up in the media as a matter of concern; in fact, we’ve actually seen some recent movement from KiwiSaver providers on fees which, given the economies of scale they now have, makes a lot of sense.

Further, it was abundantly clear that the Tax Working Group saw KiwiSaver as the vehicle of choice for retirement savings (notwithstanding other good options that are out there). In that regard, the Group’s proposals affecting KiwiSaver (a removal and graduated reduction of ESCT, lower PIRs, extending the Government contribution in parental leave circumstances, and increasing the Government contribution rate) may still be considered as part of Inland Revenue’s work programme. So, rest assured, we’ll continue to see further changes and enhancements to KiwiSaver in the future.

The importance of your PIR

On a related note, many readers may have already experienced the impact of Inland Revenue’s business transformation and its increased visibility over the PIRs that people apply to their PIE investments (including KiwiSaver) – i.e., the rate at which your PIE income is taxed.

In particular, taxpayers may have received correspondence advising that their PIR was too low in the past, or reminding them that they should change their PIR now given that it is incorrect for the 2020 year.

In short, it is critical that you get your PIR right!

If your PIR is too low, Inland Revenue is now likely to chase you for the underpaid PIE tax – that is, in this situation, you should be including your PIE income and PIE tax credits in your personal tax return.

Unfortunately, this could mean that you actually suffer an increased tax cost. This is because the PIE income could be taxed at 30% or 33%, rather than the tax being capped at 28% where it is correctly taxed within the PIE.

So, get it right and ensure you effectively use your investment savings (especially locked away savings like your KiwiSaver) to meet the PIE tax liabilities, rather than having to delve into your regular bank account and make a payment to Inland Revenue.

On the flipside, what about having a PIR that is too high? Well, currently you will simply be overtaxed and there is no mechanism for having any overpaid PIE tax refunded. Given this, and now that Inland Revenue is more actively using the information it has around PIRs, we’d like to see Inland Revenue seriously consider making overpaid PIE tax refundable. It’d be only fair, right?

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