Changing the superannuation rules

Press, 26 April 1988, Page 43

Changing the superannuation rules

By

BRIAN FRIEDLOS

Over the past 25, Nears or so. successive governments in New Zealand have recognised that! tax privileges must b-eii allowed to encourage people to set aside mioney while they are worting in order [o save for an income during retirement. Similarly, governments have Allowed tax Concessions for employers to encourage them to set up staff superannuation schemes. Now. the Government has turned the tables and has cancelled all of the tax privileges associated with private superannuation schemes. The Government’s objective! is to make saving through a superannuation scheme subject to the same ) taxation treatment as otqer'forms of saving and investment. In future, when people save for retirement through superannuation

scheme they are to be treated for tax purposes no differently than if they were saving th-lough a bank or building society. One question which arises is: How A’ill the changes affect re’’ A lot of gloom has already been expressed and it :s time to stop crying over spilt milk. The Changes have been made! and tve have to live with then). I believe:it is time we took a practical ! look at wh,at the changes mean and what should ibe done to cope with :he new situation, i : You may, be a (member of a staff superannuation scheme. It lis appropriate to understand tie problems your ;empl)yer will face and appreciate any actions taken regarding the firm’s scherre. Undoubtedly.- tour employer is going t) be concerned about the effect of the increasing costs of operating f. staff superannuation : sche ne. The

main options for an em ployer are:

Maintain present contributions' (on the grounds that net profit will be greaserji; reduce contributions to absorb the cost of fringe benefits tax: reduce contribution rates so that superannuation costs are the same as before: cease contributions and pay as salary instead: or totally reassess the staff superannuation objectives.

.As a consultant, it is my recommendation that an employer should not act hastily, but reassess the value and cost of the staff scheme to the business. If you are a member of a staff superannuation scheme then clearly! the first step is to find out what your employer will do about your firm's scheme. Then, consider the future of National Superannuation. Will you receive it, and when, and will it be enough? At this time we simply

do not know the future of National Superannuation. The most recent indication is the report by the Royal Commission on Social Policy.

Briefly, it is suggesting a two-tier scheme to be phased in over 10-12 years.

The basic tier would be a means-tested pension from age 65. The second tier would be half the first level from age 68. No amounts have been proposed.

The Royal! Commission points out that in that situation the role of private schemes)will be important. and they recommend that once the rules have been set they should be left alone.)

The next , step is to decide whether to establish your own private scheme. . i

If you do decide to set up an independent personal superannuation scheme. I I recommend

that you seek specialist advice. Your scheme should ae tailored to meet your personal needs, and there ire many (investment’ olptions available in the market with varying of the mix’ of investment exposure and return. A competent advisor can heip you to select the one (which fits your investment personality. ) When people ask me to help ith|em plan for retirement I usually recommend la five-step investigation: 1. Identify your target retirenient income objective | ai a percentage of present income. What percentage of your present salary’ | would you need if you were retiring next week?l 2. Estimate your income iat - retirement age assuming that your salary increases at. say. ,8 per cent’ per annum until then, | 3. i Work out what you

can expect from National Superannuation (assuming it continues), your firm’s scheme, and any savings or investments you can rely upon.

4. Apply your target per cent Ro your estimated final salary, deduct the projected value of the 'benefits you can confidently! expect (as in 3), and arrive at the shortfall of your target pension which! has to be privately funded. 5. Finally, inversely calculate the regular contributions you need to invest |in a private scheme in ! order to make good that shortfall. ! I believe that this is a practical | approach to planning for retirement. A properly' constructed plan of this can make all the difference between a dignified retirement and just getting by. t , Brian Friedlos is the superannuation director of Aticorp Financial Services, Ltd.