Retirement Life
3 April 2024

Long live New Zealand Superannuation

New Zealand Superannuation (NZ Super) is a thoroughly excellent scheme. It is most retired people’s financial bedrock, providing reliable income that appears every fortnight and allows people to at least buy the basics.

 

The scheme is universal (nearly) and means that there is little or no absolute poverty amongst pensioners in New Zealand. It is relatively cheap to administer and, because it is not taxed at a special higher rate for those at the age of eligibility, it provides a financial foundation without disincentivising further work.

 

No penalties for older workers

Because retirees are not deterred from working by the tax system it’s interesting to consider the large numbers of people who are employed beyond the age of eligibility for NZ Super. In fact, it is now no longer the norm for people to immediately stop work when they turn 65 – to the contrary, nearly 50% of people aged 65 to 69 are still working (this is up from about 15% in 1987).

 

Of course, a good number of these people keep working because they have to. If some people stopped work completely, they would have a very ordinary lifestyle – working for a bit longer after 65 will mean a shorter retirement, but it might be a better one.

 

More bang for your buck

From a financial point of view, working beyond 65 is a good idea for two main reasons:

 

Calculate what you could draw in retirement.

1. You ought to have more savings to live on when you do retire

Firstly, you might be able to add to your savings while you continue to earn. However, just as importantly for some, if you do not draw on your existing savings while you keep working, they should grow further through investment returns. Unfortunately (and wrongly in my opinion) employers of over 65-year-olds are not required to match KiwiSaver contributions. Nevertheless, even with no contributions, savings should grow.

 

2. You will be able to draw a greater percentage from your savings when you retire

This is because your savings don’t have to last as long. If you work for an additional five years and do not draw on savings, those savings will need to last five years less. Someone who retires at age 65 with $100,000 may be able to draw between $4-5,000 each year, whereas someone who works through to age 70 or more could perhaps draw $5-6,000 a year.

 

Good riddance to the surcharge

Critically with NZ Super there is no extra tax levied on those who choose to work while receiving it. It was not always like this. Older readers might remember the Superannuation Surcharge in the 1980s and 90s, where those receiving NZ Super faced a special tax of 20% on income over a certain threshold. This was later increased to 25% of income and the threshold was lowered.

 

Something like 23% of superannuitants lost all or part of their NZ Super because of the surcharge. It was loathed and there was a great deal of avoidance – the surcharge was one of the reasons for the immense popularity of family trusts in the 1990s.

 

Understandably, the surcharge created a disincentive to work past retirement age. If the extra income from work meant effectively losing all or part of your NZ Super, why would you bother?

 

Retirement is changing

At the moment, New Zealand needs these workers. Fortunately, most jobs do not require us to crawl around on a roof banging in nails (or other manual work) - there are many jobs for older people that can be done sitting down (like mine!).

 

The nature of retirement is much changed. Most of my parents’ generation retired on their 60th birthday (that was retirement age until it was gradually increased to 65 through the 1990s). People stopped work completely on that date, gave a retirement speech, picked up a gold watch and left work for good.

 

The numbers show that the baby boomers are different. Retirement for many will not happen on a single day but gradually over months or even years. Plenty of people continue to work past age 65 and if this you, you will have lots of company. Let’s hope that we can continue working without a surcharge or other income test.

 

We should treasure the gem that is NZ Super. Although we may need to raise the age of entitlement at some point, we should protect this scheme. Without NZ Super New Zealand would be a much poorer place to enjoy our 20 good summers.

 

Project your retirement income.

Photo of Martin Hawes
Written by:

Martin Hawes

Martin Hawes is not a Financial Adviser or a Financial Advice Provider, and the views in this article are not intended to be financial advice. The views and opinions are general in nature, and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. Martin Hawes is a director and shareholder in Lifetime Income.

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