As always, the content below is meant as general information to give you a better understanding of this topic, and is subject to our terms and conditions. You should seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances. We are happy to help you arrange this.
If you are registered for KiwiSaver, your provider should be investing your money in various places, in order to grow your nest egg.
The extra money you earn through these investments will be taxed at different rates depending on your income.
Unfortunately, this isn’t one of those ‘tax refund’ situations. if you don’t declare the correct tax rate, you could be paying too much, and you will not be able to claim it back.
What is KiwiSaver?
A bit of a refresher: KiwiSaver is New Zealand’s retirement investment initiative, and has a current membership rate of around 3 million people.
It started because us Kiwis aren’t the best at saving, or planning ahead for our retirement. Lots of people were hitting retirement with a lot of debt (for example mortgages) and no savings, expecting to live off superannuation (the ‘pension’). However, this is bugger all money, leaving many people high and dry. Further, we don’t know what the pension will look like in 10, 20, or 30+ years from now, so a plan needed to be put in place.
A lot of people signed up for KiwiSaver either when it launched, or when they started their first job. From there, most of us don’t pay all that much attention to it – until we want to withdraw the funds for our first home, or retirement.
If you don’t select which company you want to look after and invest your KiwiSaver money (provider), or which type of fund (i.e. conservative, balanced, or growth) then your money is automatically placed in a default fund.
Default funds and why they’re a bit shit.
If you don’t choose a provider and a fund, your money will end up in a default fund.
This means your money will be invested conservatively (lowest risk = potentially lower reward) and you’ll likely be placed on the highest tax rate, even if it is incorrect for your circumstances – more on that later.
Currently 400,000 New Zealanders have their KiwiSaver money sitting in a default fund. These people have missed out on an estimated $1billion in the last 6 years. *1
Now, there’s nothing wrong with being in a conservative fund, as long as it fits your risk profile. However, many people might be better off in a balanced, or more growth-focused fund. For example, a 30-year-old earning $60,000 per year, that isn’t going to withdraw their KiwiSaver until they’re 65, still has 35 years left in KiwiSaver (They’re in it for the long-haul). Their risk profile might be matched to something more growth-focused. In doing so, they could make upwards of $400,000 more before they retire, simply by switching funds. *2 Please note, this is a general example and is not personalised advice.
Your PIR (Prescribed Investor Rate) and why it needs to be spot on.
For our purposes here, you can think of PIR as ‘tax on KiwiSaver earnings’ – although it does apply to all investment earnings you might make.
For example, if you have $5,000 in your KiwiSaver account, and it earned $100 of interest last year, that $100 will be taxed.
If you were earning under $14k per year, the $100 would be taxed at only 10.5%
If you were earning $30,000 per year, it would be taxed at 17.5%
And if you’re earning over $48,000, your PIR would be 28% (the top rate).
However, it can get tricky, because it’s not just your primary income that counts. Any income you might earn off other investments, such as managed funds, needs to be taken into account. More on that here.
Also, your PIR is based off your last two years of income. If your income has changed during this period, go off the lowest amount. I.e. if you were at University and only earned $10,000 last year, but earned $50,000 working full time this year, you would base your PIR on the lower amount (the $10,000) and therefore only get taxed at 10.5%. However, at the end of next year, you would need to update your PIR to 28%.
You are responsible for making sure you’re on the correct PIR. And because many Kiwis don’t understand how it all works, many of us end up on an incorrect rate.
The IRD has a website to help you determine your PIR. It is a bit complicated, so if your finding it tricky to determine your exact rate, we are more than happy to help you out – Just click here.
What happens if you’re on the incorrect PIR?
This depends on whether you’re on a higher rate than you should be, or a lower one.
If you’re paying less tax than you should be, you need to correct your PIR asap. You may also need to file a tax return to account for the under-deduction. If you simply leave it, the IRD could hit you with a very big tax bill down the track.
If you’re paying more tax than you should be, and don’t update your PIR with your provider, that money is gone. It’s called ‘final tax’ and is not subject to any kind of refund. The best course of action is to contact your KiwiSaver provider as soon as possible, and get updated to the correct PIR.
Obviously if you don’t know what rate you’re currently on, contact your provider.
If you don’t know who your provider is, contact us, one of our financial advisers can help you get it sorted free of charge.
What if you want to change fund while you’re at it?
While you’re looking at your PIR, it’s a good opportunity to look at who your provider is, and what kind of fund your money is in.
if you like, we have a small team of financial advisers here at Ducks in a Row, that can have a quick (free) chat with you, in order to help figure out how your KiwiSaver is doing, and what other options are out there.
Just click the button below, and we’ll get in touch shortly.
References
*2 Generate Calculator - The 5 year returns shown are the average for each fund type per annum (p.a.) from sorted.org.nz Fundfinder 01/04/13 to 30/06/18 less 2% p.a. to adjust for inflation Defensive 2.17% (0.17%), Conservative 4.65% (2.65%), Balanced 6.84% (4.84%) and Growth 8.89% (6.89%) p.a. See more here