Do you ever get suspicious when someone wants to give you something for nothing. I'm talking about the $20 the government puts into your KiwiSaver account each week as long as you are putting in at least as much.
Lets look at someone on a medium-good annual salary of $60,000 and here I'm talking about a $60,000 cost to the employer. This is what he is prepared to put out for the privilege of having you work for him. You tell him to keep $2,307.69 to put into KiwiSaver, tax free, for you so your taxable income is $57,692.30. Your Kiwi Saver contribution is 4% of your taxable income or 2,307.69. (the same as your employer puts in). This is a weekly contribution of $44.38 from you and the same from your employer (of your money, remember) Since you are in the 33% tax bracket, you had to earn $66.56 to be able to put your $44.38 into Kiwi Saver. Do you see where we are going. The government $20 doesn't quite make up for the amount they charge you in taxes before you deduct this money to put into KiwiSaver. They would have had to give you $22.18 to make up for the taxes they took and we aren't finished yet.
You then earn a dividend on your money. Lets assume you earn 6% which is a historically pretty realistic figure for reasonably low-risk investments. Inflation is running at 3% so for every $100 you invest, you need $103 at the end of the year, just to break even. You end up with $106 but then since you have earned $6 and are in the 33% tax bracket, the government takes $2. You have $104 in the bank which is only a dollar earned in real terms. Index it back to the time of investment and it is worth $0.97. Your real earnings are only 0.97% Get out your pocket calculator and compound this for 45 years (your first investment at age 20 which you take out at age 65) and you have made a grant total gain of just over 50% for a life time of investment. (1.0097 raised to the 45th power, minus 1, times 100) . All subsequent contributions are in for less time and earn even less at retirement.
We haven't even factored in yet the comission that the financial provider takes.
The problem with KiwiSaver is not that you can't find an acceptable investment to put your money in. Do the sums with a 6% investment for 45 years and see what you come up with. Over 45 years a $100 investment becomes $ 1,376 or,if you factor in 3% inflation to get its true worth in dollars at the time of investment, it is $378. That isn't a very flash return for a life time but many would consider it fairly reasonable. The problem with KiwiSaver is the tax regime which requires you to have to earn $150 for every $100 you invest and then taxes not the money you really earned ($3 on $103) but on the whole $6. The other three is eaten up by inflation. Remember that inflation is, to a large extent, government controlled.
In case you think I am being picky, other jurisdictions have got it right. Our next door neighbours, Australia charge 15% on money its workers invest and $15% on their earnings regardless of their tax bracket. This is from their web site and they probably don't emphasize the fine print so there may be "whichevers" and "wherefores" that detract from this apparently advantageous picture. America and Britain, as far as I can work out, charge nothing on the money they invest and nothing on their earnings. I 'stand under correction' on this and would be very happy to hear comments from anyone who lives under these systems as the web sites are not that easy to follow.
The problem with KiwiSaver is not the plan itself but the government tax structure. They don't have to make it seem that we are getting something for nothing. There is a name for that. They just have to let us keep more of what we actually earn and give over on the idea that since this is a savings scheme, we really shouldn't expect a decent return for tying up a large portion of our disposable income for most of our lives. Do the maths and you will find that it is a far better investment under most economic conditions to invest a greater amount in your morgage. Calculate your net worth at 65 and this will put you far ahead of investing in KiwiSaver.
(disposable income - the income left after you pay off rent, electricity, basic food and so forth).
Showing posts with label kiwi saver. Show all posts
Showing posts with label kiwi saver. Show all posts
Wednesday, September 19, 2007
Tuesday, September 18, 2007
Pension Funds and Solar Panels
Some governments say that the main purpose of a pension fund is to provide for us in our retirement. They sometimes hint, that since it is a savings plan and not an investment, we shouldn't really expect much of a return (Yeah right!!!!) and should be grateful for any contributions or tax concessions they make. Since pension funds are "for our own good", lets take them at their word and see if they will "put their money where their mouth is". What about allowing us to use funds from our pension fund for putting solar water-heating panels and/or solar electric panels on our roofs or for that matter, to insulate our houses.
The oft quoted expenditure for water heating is about a third of a typical electrical bill so if we install a solar water heater, all this saved money will be available for retirement saving, making us even better off in our retirement. The typical pay back time for solar water heating is between 5 and 10 years and the earlier we install it the more we will earn. Moreover, when we retire, the children are likely out of the home so we can probably get all our hot water needs without having to use supplementary electricity. If there was ever a use of our pension money that would leave us better off in our retirement, this is it. And what about installing Solar-Electric panels. Here the benefit is even greater.
With Solar-electric, again we score well before retirement. The one time investment will pay dividends all through our life, leaving us more money from our income for saving. When we retire, with the kids out of the house and electrical demand reduced, we may even be receiving a net income from our solar panels. Our own private pension plan. Even better, since our excess generation is turning the metre backwards, we save on our tax bill. When we buy electricity, we pay GST(VAT). Since we are reducing our payments we pay less GST.
We also gain on the other end. If you sell something, you pay income tax on your earnings. Here you are simply turning the meter backwards. In so far as it is balancing your electricity use, it's neither income or expenditure so you don't pay tax on this money. Better and better.
The expense reduction I am really looking forward to, though, is when purely electrical cars with, say, a 200 km range and a reasonable price tag, come on the market. Every home will have a 'petrol station' on the roof in the form of their solar panels. The car gets plugged in and the house "fills the tank". Add solar panels to the roof and hood of the car and you could perhaps add an extra 10 to 20km of driving for a day in the sun.
A further benefit of solar electric will occur to the canny retired couple who are now at home during the day. They will be able to do their bread making, hovering, laundry etc during the day when the sun shines. This will avoid the price differential between the buying and selling price of their electricity#. Therefore it is to the advantage of the house owner to use electricity when they are generating their own. The electricity company shouldn't have it all their own way, though. A household will be producing power during the day when the electric company charge the highest rates. Their payment to you should reflect this. Also with diffuse power generation all over the country, generation will be, on average, closer to the user so line losses will be less. This should also be reflected in the payment to the domestic generator.
#There will always have to be a price differential. The power company will have to charge you more for a unit of electricity than what they pay you. After all, they must maintain the distribution network
Solar panels, whether electrical or water heating, are a true retirement saving plan but in addition they fulfil a number of national goals. These include reduction of our carbon foot print, reducing the need to build more unsightly power pylons (power generated diffusely and hence nearer to the users), reduced need to flood more river valleys, reduced negative balance of payments due to less fossil fuel imports, reduced air pollution from thermal power stations and vehicles, reduced chance of power breakdowns in times of national emergency (inter-net effect) and reduced health bills from air pollution. With such a long list of beneficial effects combined with the obvious retirement benefits, I'm sure the government will approve using pension funds for domestic solar panels. Let's see if your government is really serious when they advertise that your contribution to a pension plan is for your own good.
The oft quoted expenditure for water heating is about a third of a typical electrical bill so if we install a solar water heater, all this saved money will be available for retirement saving, making us even better off in our retirement. The typical pay back time for solar water heating is between 5 and 10 years and the earlier we install it the more we will earn. Moreover, when we retire, the children are likely out of the home so we can probably get all our hot water needs without having to use supplementary electricity. If there was ever a use of our pension money that would leave us better off in our retirement, this is it. And what about installing Solar-Electric panels. Here the benefit is even greater.
With Solar-electric, again we score well before retirement. The one time investment will pay dividends all through our life, leaving us more money from our income for saving. When we retire, with the kids out of the house and electrical demand reduced, we may even be receiving a net income from our solar panels. Our own private pension plan. Even better, since our excess generation is turning the metre backwards, we save on our tax bill. When we buy electricity, we pay GST(VAT). Since we are reducing our payments we pay less GST.
We also gain on the other end. If you sell something, you pay income tax on your earnings. Here you are simply turning the meter backwards. In so far as it is balancing your electricity use, it's neither income or expenditure so you don't pay tax on this money. Better and better.
The expense reduction I am really looking forward to, though, is when purely electrical cars with, say, a 200 km range and a reasonable price tag, come on the market. Every home will have a 'petrol station' on the roof in the form of their solar panels. The car gets plugged in and the house "fills the tank". Add solar panels to the roof and hood of the car and you could perhaps add an extra 10 to 20km of driving for a day in the sun.
A further benefit of solar electric will occur to the canny retired couple who are now at home during the day. They will be able to do their bread making, hovering, laundry etc during the day when the sun shines. This will avoid the price differential between the buying and selling price of their electricity#. Therefore it is to the advantage of the house owner to use electricity when they are generating their own. The electricity company shouldn't have it all their own way, though. A household will be producing power during the day when the electric company charge the highest rates. Their payment to you should reflect this. Also with diffuse power generation all over the country, generation will be, on average, closer to the user so line losses will be less. This should also be reflected in the payment to the domestic generator.
#There will always have to be a price differential. The power company will have to charge you more for a unit of electricity than what they pay you. After all, they must maintain the distribution network
Solar panels, whether electrical or water heating, are a true retirement saving plan but in addition they fulfil a number of national goals. These include reduction of our carbon foot print, reducing the need to build more unsightly power pylons (power generated diffusely and hence nearer to the users), reduced need to flood more river valleys, reduced negative balance of payments due to less fossil fuel imports, reduced air pollution from thermal power stations and vehicles, reduced chance of power breakdowns in times of national emergency (inter-net effect) and reduced health bills from air pollution. With such a long list of beneficial effects combined with the obvious retirement benefits, I'm sure the government will approve using pension funds for domestic solar panels. Let's see if your government is really serious when they advertise that your contribution to a pension plan is for your own good.
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