KiwiSaver

Portfolio Investment Entities

The introduction of the PIE regime was a response to the over-taxation of managed funds, which was a major barrier for investors, when considering the whole range of investment options. In the past, funds would pay tax at the company rate (it was then 33 cents in the dollar) and those on a lower rate (say 19.5 per cent) could not claim back the difference. In effect, investors were taxed 33 per cent regardless of what other income they had.

So, the PIE regime was born – and a good thing for investors too. The playing field was tilted away from managed-funds investors but now it has been levelled (in fact, tilted in favour of managed funds in many cases).

Managed funds may now apply to become PIEs (nearly all have) and when they have been registered as PIEs they will deduct tax from each investor’s returns and distribute the income with no more tax for the investor to pay. However, the investor has to tell the managed fund what his or her tax rate is for PIE purposes. This is called the Prescribed Investor Rate (PIR) and it is different from your ordinary tax rate. PIRs are calculated by adding together the ordinary taxable income that some has (e.g. from wages, salary, NZ Super etc.) to the income that they  derive from PIEs. This table shows you what your PIR will be at various income levels.

Note from the table that you cannot pay more than 28 per cent tax if you invest in a managed fund which is PIE. This is especially useful for high-income earners who are on the top rate of tax (33 per cent). If these same people made investments in something that was not a PIE (e.g. if they were direct investors in shares, bonds, bank deposits or property syndicates) their investment income would be added to the income they earn from their salaries and this would be taxed at 33 per cen. By investing in a managed fund is a PIE, their investment is taxed at no more than 28 per cent.

No investment should ever be made solely for tax purposes. However, once a particular type of investment is chosen, you should certainly look for the most tax-efficient means of making the investment and PIEs often fit that bill. For example, if you decide to invest in commercial property; you could choose to invest in a small property syndicate in which case income from the syndicate would be taxed at your own rate. However, if you decide to invest via a managed fund that was a PIE(e.g. Kiwi Income Property Trust o MAP NZ Office Trust) you could be taxed at your PIR which could be lower.

One area where this can be important is for those making term deposits and holding cash with their banks. Banks have established ‘cash PIEs’ – managed funds that invest in term deposits and the like and these have been able to get PIE status. These ‘cash PIEs’ are more tax efficient than ordinary term deposits and savings accounts with much the same risk – except that some of these PIEs may not carry the government guarantee. You should check before investing.

KiwiSaver as a DHB employee

As you are aware Kiwisaver can be part or all of your DHB subsidy. The absolute majority of doctors who I deal with in Kiwisaver are in it on a splitting basis with superannuation.

Contribution levels

These are fixed at either 3%, 4% or 8% of your gross income. No other figure is possible. If you wish to save additional monies super offers flexibility here in that you can save any amount. Note that if you are only in Kiwisaver and wish to pick up the 6% gross DHB subsidy you need to save 8% as 6% is not an option.

Access

Standard features for access for both super and Kiwisaver include death, permanent disablement and financial hardship.

Funds can be accessed from Kiwisaver other than these in two circumstances:

  • If you haven’t purchased your first home once you have been a member for 3 years and made 3 years contributions you can withdraw both your and the employer contributions towards your deposit.
  • Once you reach the age of eligibility for NZ Super (currently 65) your funds are available. Of course the government decides on this age which needs to increase over time due to the demographics.

Government benefits

Currently when you enrol in Kiwisaver the government deposits a one off lump sum of $1,000. In addition if you contribute at least $1,042/yr the government will add a tax credit annually of $521. This means at a 3% contribution rate you need to be earning a minimum of $34,733 gross per year. If you have additional self employment income and are not set up for PAYE, you can invest the $1,042 annually and pick up the tax credit. Note The Kiwisaver tax credit year runs from 1 July to 30 June each year. In the first year of membership you will only receive a proportionate amount of tax credit based on what time of the year your $1,042 investment was made. This is not an issue in subsequent years.

Changing providers

It is easy to change providers. All you need to do is complete an application for the new scheme and the rest is taken care of.

Opt out process

Should you not wish to join Kiwisaver you need to opt out within the first 8 weeks of joining a new employer (note you cannot opt out in the first two weeks, however deductions over this time will be refunded).  Opting out needs to be exercised each time you start with a new employer. Of course if you join Kiwisaver it will follow you around (like a loyal dog) employers without the need to re join.

Contribution holiday

If you wish to stop contributing to Kiwisaver for a period of time (up to five years at a time) you can, once you have contributed for a year.  Should you wish or need to, contribution holidays can be rolled over every 5 years. The process for a contribution holiday is to complete a contribution holiday form (KS6 obtained from www.kiwisaver.govt.nz ) and send it to the IRD. Once they have replied and confirmed this, forward their confirmation to your payroll.

The future

One thing (and this would be my biggest criticism of Kiwisaver) you can be guaranteed about Kiwisaver is that it will be constantly changing. The reason for this is that the government make the rules. Since it was created in 2007 there have been numerous changes (without going into the details).  You will no doubt be aware that if Labour is the government after the September election there will be further changes (compulsion, increase in contribution rates, ability for the Reserve Bank to increase contribution rates as a monetary policy tool and finally a likely increase in the retirement age (which I agree with).

Conclusion

Kiwisaver is here for good. It can be a useful part of your retirement savings mix. The key is to understand its nuiances so it can work to your best advantage.