Q I started a new job recently. I have been automatically enrolled in KiwiSaver, but I'm thinking of opting out. I see from my payslips that both my contributions and my employer contributions are taxed. What other taxes am I paying? Will I be taxed again when I take money out of KiwiSaver when I'm 65? I am 53 now.
You can't avoid taxes in our society and without them we wouldn't have all the social welfare, health and education benefits we currently enjoy. And if you think we aren't well looked after, try living in a country like Zimbabwe or Somalia.
Tax is a bit of a red herring and should certainly not put you off joining KiwiSaver. Employees have paid tax on their contributions since the scheme was first launched in 2007 but employer contributions were exempt from tax for three years until April 1, 2012.
KiwiSaver is still generous in that all eligible members get the $1000 "kick start" and up to $521 per year in Member Tax Credits (which is basically an annual Government "top up" paid directly into your KiwiSaver fund).
The amount of tax you will be paying on your KiwiSaver contributions is minimal compared to other taxes - such as PAYE on your wages or GST on your spending. Someone earning $45,000 a year will pay around $7000 a year (or 15 per cent) in tax and then another 15 per cent in GST on almost everything they buy from groceries to petrol (and then there's 61c in excise tax for every litre of petrol).
When last did you hear someone say they wouldn't buy a car because of the ever-increasing tax on petrol? Once your money is in KiwiSaver, there may be more tax to pay, but it will depend on where your money is invested. Your fund manager will seek to invest in a tax-effective way. Most KiwiSaver schemes are PIE funds. PIE stands for "Portfolio Investment Entity". This is a legal structure for investments introduced in October 2007 and offering a more favourable tax structure to investors.
Investors nominate their Prescribed Investor Rate (or PIR) based on their income, with a top rate of 28 per cent (rather than 33 per cent, the top tax rate for income tax). So there is a tax break for investors there. The lowest PIR rate is 10.5 per cent and usually applies to children and lowest income earners.
A typical KiwiSaver scheme will invest in cash, fixed interest, shares, commodities and currency. Not all the investments will be liable for tax. The fund manager will work out how much tax needs to be paid within the fund and the returns you see are after taxes have been paid. If you have selected the correct PIR there is no more tax to pay at the end of the tax year. You will receive regular statements showing your PIE tax (paid)/refunded. You will probably be surprised by how little it is. PIE income generated by KiwiSaver will not affect entitlements for Working for Family Tax Credits.
When you become eligible to withdraw your savings at age 65 there will be no tax to pay on whatever you receive.
Shelley Hanna is an authorised financial adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 8703838. The information contained in this article is of a general nature and is not intended to provide personalised advice. If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email email@example.com.