More than half of your KiwiSaver could be lost to tax - not because of high rates, but because compounding returns are cut short. In this episode, the team explores what would happen if KiwiSaver became tax-free, and whether it could really double your balance by the time you retire.
The Case for a Tax-Free KiwiSaver
New Zealanders face a looming retirement challenge – too many people are set to retire without enough savings, leaving them reliant on NZ Superannuation. The hosts ask: what if we simply stopped taxing KiwiSaver?
Currently, around $111 billion sits in KiwiSaver funds. With average investment returns near 10% a year, that’s roughly $3 billion in tax collected annually. While that sounds like a lot, the argument is that tax doesn’t create new wealth – it just shifts money “from your left pocket to your right.”
If those investment returns weren’t taxed, the outcome could be staggering. For an 18-year-old earning $80,000 and contributing 4%, the difference between a taxed and tax-free KiwiSaver could mean retiring with $2 million instead of $900,000 – a $1 million difference purely due to compounding.
As one host put it: “If you’re compounding at 9% a year versus 6.5%, the long-term results are worlds apart.”
Why Tax-Free KiwiSaver Could Strengthen the Economy
Removing tax from KiwiSaver wouldn’t just benefit individuals – it could also reduce the government’s long-term burden. With fewer retirees depending on Super, the state’s fixed costs could fall.
While the government might collect less tax initially, that money could instead circulate through the economy, boosting productivity and returning in other ways – through business growth, wages, and investment.
The hosts suggest a tax-free KiwiSaver could even spark greater local investment. If KiwiSaver funds had more to invest, New Zealand could attract more capital for infrastructure, housing, and innovation – especially if fund managers created local “NZ growth” options aligned with national development.
However, they also acknowledge the challenges – ensuring funds stay invested locally, managing financial literacy as balances grow, and maintaining trust in how people handle larger lump sums at retirement.
Superannuation, Sustainability, and the Future
New Zealand’s population is ageing, and that puts pressure on Superannuation. The team notes it’s becoming a political “hot potato,” with fewer workers supporting more retirees.
They predict that means-testing NZ Super – where wealthier retirees receive less or none – is likely inevitable. That makes a stronger, self-sufficient KiwiSaver system even more important.
If every Kiwi reached retirement with $2 million instead of $1 million, it could reduce dependency on government support entirely. That shift would create more independence and resilience – though it would take decades to fully materialise.
Key Takeaways
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Over 50% of your KiwiSaver returns can be lost to tax due to missed compounding.
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Making KiwiSaver tax-free could double your retirement balance.
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The government currently collects around $3 billion a year in KiwiSaver tax.
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A tax-free system could reduce long-term reliance on NZ Superannuation.
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Greater investment freedom could boost productivity and local growth.
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Financial literacy and annuity options will be key for managing larger balances.
Next Steps
You can’t control how KiwiSaver is taxed, but you can control how it’s invested. Book a free 30-minute KiwiSaver review with a Lighthouse adviser to make sure your fund is aligned with your goals and growing for your future.
If you’d like to learn more, check out these other episodes below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
