Ageing well involves considering all aspects of your life – health, wealth and happiness. We are going to focus on the second item – wealth. Having enough money set aside for retirement is imperative for a happy retirement.
The lack of corporate pensions or compulsory superannuation in New Zealand has resulted in a large deficit in most peoples’ financial planning. KiwiSaver is a relatively new addition to the financial landscape and for many people it came too late. The KiwiSaver scheme continues to be refined and most recently the Tax Working Group (TWG) has recommended removing Employer Superannuation Contribution Tax (ESCT) on employer KiwiSaver contributions for those earning up to $48,000 pa as a way of assisting New Zealanders as retirement approaches. The TWG also recommended reducing tax rates for KiwiSaver funds. Although small recommendations, this will have a significant impact over time for each person invested in the scheme.
KiwiSaver
Check that you are contributing as much as you can. Over the years, KiwiSaver has had changes made to improve it and to give us more options. If you have reduced your hours as you approach retirement, check that the correct rate of ESCT is being withheld. Some employers may be over-deducting based on your original salary or wage.
Also check whether your employer is paying their contribution over and above your salary. Some employers have chosen to interpret the rules as a “total remuneration” approach and take their employers KiwiSaver contributions out of your remuneration, rather than contributing 3% above your salary. While not against the black letter law, this approach flies in the face of the intention of the scheme. Employer contributions are supposed to be on top of your remuneration package, unless through good faith bargaining you have agreed that the employer contributions can be offset from your salary. An employer’s approach can be a deal breaker for prospective employees, and in a tight labour market this may be a key consideration for employers.
Overseas pensions
A large number of Auckland’s population are immigrants. Those who have superannuation schemes overseas potentially face a large tax liability when they transfer their fund to New Zealand if they do not make use of the relief offered under the four-year exemption period. At Bellingham Wallace we have advised many clients on the tax implications while they weigh up the decision to transfer their foreign superannuation. Remember that waiting for foreign exchange movements to improve are not the only consideration. Obtaining sound tax advice alongside the financial advice is key to keeping as much of the fund in tact on transfer.
Voluntary schemes
You can contribute to more than one pension scheme during your working life. If you were in a superannuation scheme under a previous employer consider continuing voluntary contributions. Some schemes allow you to withdraw funds at an earlier age than KiwiSaver. This means that you could be entitled to a lump sum withdrawal up to 10 years earlier than when your KiwiSaver matures! This would give you options to discuss with your financial advisor, and still have 10 years of KiwiSaver contributions to continue with.
State superannuation
If you have lived overseas be prepared to be questioned about your entitlement to overseas pensions. Recently we assisted a lady who lived in Australia in the 1970s. WINZ threatened to stop her state pension unless she proved that she was not eligible for the Australian pension. Our government is making sure that it covers all bases and will not pay a pension unless it truly has to. In addition, keep an eye on your tax residency. If you are out of the country (travelling the world like you always planned) then be mindful that your movements can impact your eligibility for state superannuation. Generally, if you leave New Zealand for an extended period of time, or even spend more time outside of the country than in, then you will have to look closely at whether your travel plans will affect the payment of your pension. The state superannuation is not means tested in this country and this is a major positive point for New Zealanders. While some extraordinary people have elected not to draw the state pension, the majority of us don’t have that luxury.
In closing
Ageing is a part of life and we can manage certain aspects of it. Being responsible regarding for your financial future requires planning and assessing the options available to you. When taking financial advice, always obtain tax advice too. The tax team at Bellingham Wallace are happy to work alongside your financial advisor to ensure you get the best outcome.
