Superannuation

NZRT Transfer Update

For all doctors at ADHB and WDHB your Super which was previously in AMP Business Super has been transitioned to AMP New Zealand Retirement Trust.

You would have received a letter from AMP stating funds had been withdrawn from your AMP Business Super. No need to be alarmed about this as the funds have merely been withdrawn and transferred to the NZ Retirement Trust Plan. The NZ Retirement Trust Plan offers an online facility which allows you to check your balance, contributions and investment choices.

You should have received a welcome letter recently with login details. For those of you at CMDHB the transfer to NZRT will take place in February.

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.

Planning your Superannuation

The logical way to plan your super is in two steps:

  1. Work out how much you will need in retirement.
  2. Work out how much you need to save to get that amount.

As with any long-term plans, there are many variables and plenty of scope for things not to work out as planned. The Office of the Retirement  Commissioner has produced material to help with these calculations. This information is free, so why not use it?

How much will you need in retirement?

There’s not always an easy answer to this one. There are many unknowns, about which you need to make educated guesses, such as:

  • The age at which you will stop working (many people can and wish to continue working beyond age 65).
  • The age you will live to.
  • The lifestyle you will want. It may be cheaper to live in retirement but you may want to continue some expensive habits.
  • Your health-care needs.
  • The amount of government assistance.
  • Investment rates of return while you are in retirement.
  • The rate of inflation between now and retirement.
  • The degree to which you will be comfortable spending your capital – if you spend everything there will be no inheritance for your children.
  • Whether you will use the equity in your house to live on.

If you can calculate how much you will want each month to live, there are financial tables to work out the amount of capital required to give that amount. There is plenty of scope for those calculations to be inaccurate, but it is still an exercise worth doing. As a benchmark, it is generally thought that most people need about 70 per cent of the income they require before retirement.

How much should you save?

Once you have calculated the capital sum you need to produce a reasonable income, it is relatively easy to work out how much you must save. There are two main variables:

1. The time you have before you are likely to retire

Remember this plan may change: some people decide to retire sooner; some have retirement forced on them by ill-health or redundancy; others decide to work longer.

2. The returns you have before you are likely to retire

This is harder to predict, but over time a good diversified portfolio should earn 5 per cent after tax and fees.

If you know these two things, and the capital sum you require, it’s relatively easy to calculate the amount you must save weekly. A financial planner can make this calculation or you can use the Retirement Commissioner’s website www.sorted.org.nz. If you can’t afford to save the amount you have calculated, don’t despair. Save what you can within your budget and lifestyle. As time goes by you will probably be able to save more: your salary may rise, you may pay off the mortgage your partner/spouse may go back to work etc. Even a little saved now helps – it provides a base and will grow as the returns compound over the years.

Start early

Most people should pay off their mortgage before they start to save. However, as soon as you can, start saving and investing. Time makes all the difference:

The more time you have, the more you can tuck away. If you start at age 45, you have 240 months to make regular payments into a fund before reaching 65; if you start at age 35, you have 360 months.

The more you have, the better compound interest will work for you.

  • Age 45 years, saving $200 per month (6 per cent) at 65 years: $92,800
  • Age 35 years saving $200 per month (6 per cent) at 65 years: $201,900

The difference is obvious. Start saving as soon as you can!

 

Taken from: Financial Secrets, Martin Hawes, April 2002