By Jenée Tibshraeny
Has your income changed recently?
Perhaps you’ve had a pay rise or reduced your hours at work.
Well I have a seemingly obvious but important public service announcement for you.
It’s up to you to make sure you are paying the right amount of tax on your KiwiSaver.
While you don’t have to take care of the tax you pay on your salary or wages, KiwiSaver is different.
When you sign up to a scheme, your provider will ask you what your prescribed investor rate (PIR) is. Easy.
But unless you’ve changed schemes, you may not have paid much attention to your PIR again.
If during this time your income has increased in such a way you should have a higher PIR, it’s up to you to update your provider.
If you don’t, you’ll need to file a tax return to account for the under deduction. Shortfall penalties may apply.
But if your income has decreased in such a way that you should have a lower PIR, and you don’t tell your provider, you won’t be refunded.
Yes - this is a mismatch.
A minor issue for the country, a big one for the individual?
Given the lack of financial literacy around KiwiSaver, I'm concerned there may be a number of people using the wrong rate.
At the worst end of the spectrum I have heard anecdotes of people thinking the PIR refers to the expected rate of return, so have selected the highest rate of 28%.
The Inland Revenue (IRD) however says there isn't a major compliance problem around PIRs because “the process of getting it right is so simple”.
It says it regularly urges taxpayers to update all of their tax-related details.
It also says it “understands” providers remind their members to update their details.
As someone whose job it is to spend a fair bit more time than the average person looking at personal finance matters, I haven’t noticed the IRD or KiwiSaver providers pay a whole lot of attention to PIRs.
While the IRD says it would “see a PIR discrepancy if it became evident during an audit or investigation of some other kind”, I suspect it isn’t worth its while proactively monitoring people's PIRs.
After all, it has nothing to gain if it finds a person paying 28% when they should've been paying 10.5%.
Yet the difference this could make for the individual over time could be substantial, especially if you consider the return that over-payment could've earnt.
And if the IRD finds a person's been paying 10.5% when they should’ve been paying 28%, they could find themselves slapped with a nasty bill.
As for providers, well, this is just one of many areas I believe they could do a better job communicating with their members on.
There’s no denying it, people disengaged with their finances are the real culprits here. And even if reminders are sent out, what's to say people will pay attention to them.
It just seems a bit off that the country’s almost universal retirement savings scheme hinges on a tax system that puts the onus on the taxpayer to determine their tax rate, when the PAYE system doesn't.
CFFC calls for automation
The Commission for Capability's managing editor, Tom Hartmann, agrees and is particularly concerned about those paying too much tax.
The Commission would therefore like to see people somehow automatically allocated a PIR.
"It just seems to us in this day and age that something like a tax rate should be able to be automated and not left up to KiwiSaver members to get this right," Hartmann says.
The Commission didn't include this recommendation in its three-yearly Review of Retirement Income Policies published in 2016, so hasn't yet fleshed out the logistics of how this could be done.
Nonetheless, I agree with Hartmann.
While the need is most pressing for KiwiSaver members, it would also be handy for those invested in other portfolio investment entities (PIEs).
And if you think you’ve been using the wrong PIR, see this IRD page.
This page on the Sorted website also has more information.