KiwiSaver-lite gets green light

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The National government has pushed through changes to the KiwiSaver scheme that have effectively halved the long-term contribution rate from 8% to 4%.

Thursday, December 11th 2008, 11:24PM

by David Chaplin

Included in The Taxation (Urgent Measures and Annual Rates Bill) passed today, the KiwiSaver amendments have reduced the minimum employee contribution from 4% to 2% and have also capped the tax-free compulsory employer contribution at 2%.

Compulsory employer KiwiSaver contributions are currently at 1% but were due to rise to 4% over the next three years. National also scrapped the employer tax credit and the KiwiSaver fee subsidy in the legislation, with all changes due to take effect on April 1 next year.

The new law also allows all KiwiSaver members to claim the $1,040 annual credit if they contribute an equal amount over the year. According to a statement from the Finance Minister, Bill English, the net cost of this change would amount to only $22 million over five years after factoring in the abolition of the fee subsidy.

In the preamble to the new legislation it says cutting the fee subsidy could hurt KiwiSaver members “who have account with small balances and no contributions and inadequate returns as their account balances will erode over time.”

However, the government says: “The member tax credit is intended to act as an incentive to make additional contributions so this will not happen.”

While the new Bill has retained many of KiwiSaver features, the government said the scheme's incentives appeared too costly because of the unexpectedly high take-up.

“Secondly, there are significant concerns over whether KiwiSaver’s incentives are overly generous – particularly given the related PIE tax incentives,” the Bill says. “Further, there is now doubt as to whether KiwiSaver expenditure represents an efficient use of resources given the scheme’s potential to:

• facilitate the re¬allocation of existing savings rather than generating additional new saving:
• reduce overall levels of savings because of reduced levels of government saving:
• make the distribution of retirement wealth more inequitable.”

The government also states in the preamble that KiwiSaver and the PIE regime will be assessed in a “comprehensive Joint Evaluation Strategy”.

According to the statement, the assessment would investigate how KiwiSaver and the PIE rules have affected savings behaviour with a full report expected by 2013.

« KiwiSaver enters Reserve Bank stats with style

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