Key Takeaways
- Tax is paid on all income earned in New Zealand, including pensions and benefits
- Pensions are paid by people who are paying tax now, as part of general government expenditure, rather than from a pool of tax paid during working lives
- KiwiSaver contributions can be increased through IRD’s myIR system, but employers are only required to match contributions at the default rate
- There is no ceiling on the amount of money that can be received before affecting the pension
- Retirees living overseas may be eligible for New Zealand Superannuation, depending on the country and reciprocal agreements
Introduction to Taxation on Pensions
The question of why we pay tax on our pensions is a common one, and it’s a topic that can be confusing for many people. The idea that we pay tax into a pool during our working lives, from which we will be paid a pension when we retire, is a misconception. In reality, pensions are paid by people who are paying tax now, as part of general government expenditure. This means that the money used to fund pensions is not coming from a pool of tax paid during working lives, but rather from the current tax base. This is an important distinction, as it highlights the fact that tax is paid on all income earned in New Zealand, including pensions and benefits.
Understanding Taxation on Benefits
The second part of the answer to this question comes down to why we pay tax on benefits at all. Tax is paid on all income earned in New Zealand, even when it is money that comes from the government. Although it may seem counterintuitive, the money received from benefits is calculated as a gross payment, and then the tax is determined according to the individual’s situation and the current rules. For example, if someone is working and claiming a benefit, such as NZ Super, they may end up with a higher marginal tax rate on their pension because their overall income is higher. Some people argue that benefits should be tax-free, but this is a separate conversation. It’s worth noting that the tax system is designed to be progressive, with higher income earners paying a higher tax rate. This means that those who are receiving benefits and have a higher overall income may be subject to a higher tax rate.
Checking and Increasing KiwiSaver Contributions
Another common question is how to check and increase KiwiSaver contributions. The good news is that it’s easy to check your KiwiSaver balance at any time through your KiwiSaver provider. Most providers have an online platform that allows you to view your balance, or you can give them a call to find out what options are available. If you’re not sure who your provider is, Inland Revenue can tell you. To increase your KiwiSaver contributions, you can do so through IRD’s myIR system, by contacting your KiwiSaver provider, or by giving your employer notice. However, it’s worth noting that your employer is only required to match your contribution at the default rate, which is currently 3 percent but is slowly increasing to 4 percent by 2028. Some employers may be willing to match higher amounts, but this is not a requirement.
Impact of External Income on Pensions
A question that may be on the minds of many retirees is whether there is a ceiling on the amount of money that can be received before affecting the pension. The good news is that there is no ceiling on the amount of money that can be received. However, other amounts may affect access to things like the accommodation supplement, and you may end up on a higher marginal tax rate depending on where the money is coming from. For example, if a family member were to put $1000 per week into your bank account, this could potentially affect your eligibility for certain benefits or your tax rate. It’s always a good idea to consult with a financial advisor or tax professional to understand how external income may impact your pension and tax situation.
Retiring Overseas and Access to New Zealand Superannuation
For those who are planning to retire overseas, it’s essential to understand the rules around accessing New Zealand Superannuation. If you are going to be overseas for more than six months, you need to apply to the Ministry of Social Development (MSD) if you want to keep your pension going. You will need to do this at least six weeks before you leave New Zealand. If you haven’t notified MSD and you are away for more than six months, they may ask for the sum to be returned. The amount you can receive if you are eligible for New Zealand Superannuation but living overseas depends on the country you’re going to live in. Some countries, like Australia, have reciprocal agreements with New Zealand, which means that applications for New Zealand Superannuation can be made while you are resident in that country, and New Zealand residence can count for pension eligibility in the agreement country. If you’re planning to retire overseas, it’s crucial to get in touch with MSD well before you leave to find out how the rules apply to your case.
Conclusion and Further Resources
In conclusion, understanding taxation on pensions and benefits, as well as the rules around KiwiSaver and retiring overseas, can be complex and confusing. However, by seeking out reliable sources of information and consulting with financial advisors or tax professionals, individuals can make informed decisions about their financial situation. For more information on personal finance and the economy, sign up for the weekly newsletter, Money with Susan Edmunds, which covers all the things that affect how we make, spend, and invest money. By staying informed and taking control of your financial situation, you can make the most of your retirement and achieve your financial goals.