Susan's question is a common one, and it's a real head-scratcher: Why do we pay tax on pensions when we've already paid tax on our income? It's a topic that can leave many people feeling puzzled and perhaps even a little frustrated.
But here's the deal: the pension system isn't as simple as it may seem. While it's true that you've paid taxes throughout your working life, the pension you receive isn't directly funded by those past payments. Instead, pensions are financed by the taxes of the current working population. So, the tax you pay now contributes to the pensions of retirees, and when you retire, the working generation will fund your pension.
This leads to the next question: why tax benefits at all? Well, in New Zealand, tax is levied on all income earned, even if it's from the government. When it comes to benefits, it's an administrative process where the gross payment is calculated, and then tax is determined based on your personal circumstances and the current tax rules. And here's where it gets controversial: this means that your pension could be taxed at a higher rate if you have other sources of income, like a job.
Some argue that pensions should be tax-free, but that's a debate for another time. Now, let's address some practical concerns you might have...
Checking Your KiwiSaver Balance: You can easily check your KiwiSaver balance through your provider's online platform or by giving them a call. If you're unsure who your provider is, Inland Revenue can help you out.
Increasing KiwiSaver Contributions: You have the power to change your contribution rate through the IRD's myIR system, by contacting your KiwiSaver provider, or by informing your employer. Your employer typically only needs to match the default contribution rate, which is gradually rising to 4% by 2028. However, some employers may match higher contribution rates.
The Impact of Additional Income: There's no ceiling on how much additional income you can receive without affecting your pension. However, it could impact your eligibility for certain supplements and may result in a higher marginal tax rate, depending on the source of the income.
Retiring Abroad: If you plan to retire overseas for more than six months, you must notify MSD to continue receiving your pension. The amount you'll receive if you're eligible for New Zealand Superannuation while living abroad depends on the country you're moving to. Countries with reciprocal agreements, like Australia, allow you to apply for New Zealand Superannuation while residing there, and your time in New Zealand can count towards pension eligibility in those countries. For countries without such agreements, the pension amount may be based on the number of months you lived in New Zealand between the ages of 20 and 65.
So, there you have it! A complex topic, but hopefully, a clearer understanding of why we pay tax on pensions and how the system works. Do you agree with this tax structure, or do you have a different perspective? Let's spark a conversation in the comments!
