KiwiSaver and Care Costs: Why Your Retirement Savings May Not Be As Secure As You Think
Nearly half of New Zealanders are deeply concerned about affording quality aged care, according to a recent report by Financial Services Council. This anxiety isn’t unfounded. A little-known aspect of New Zealand’s relationship property laws means your KiwiSaver, even if diligently built over decades, could be used to fund a partner’s residential care – even if you’re financially independent. This isn’t a hypothetical worry; it’s a growing reality for many couples, and understanding the implications is crucial for proactive financial planning.
The Relationship Property Trap: KiwiSaver as a Shared Resource
The core issue stems from how New Zealand law treats assets within a marriage or de facto relationship. KiwiSaver, generally considered a retirement savings vehicle, is classified as relationship property. This means that, in the event one partner requires long-term residential care, their share of the combined relationship property – including your KiwiSaver – can be assessed to determine eligibility for a government-subsidized rest home place. The threshold for qualifying for assistance is surprisingly low: just $291,825 in combined assets (or $159,810 excluding the family home and car). If your combined assets exceed this, your KiwiSaver may be drawn down to meet the cost of care, potentially leaving you with significantly less for your own retirement.
Beyond Contracting Out Agreements: Limited Protection
Many assume a contracting-out agreement – a legal document specifying how assets are divided – offers sufficient protection. Unfortunately, this isn’t always the case. As Susan Edmunds, RNZ’s money correspondent, points out, even a robust contracting-out agreement may not prevent KiwiSaver funds from being assessed for care costs. The legislation prioritizes ensuring access to care, and KiwiSaver is viewed as a readily accessible asset. While trusts were once considered a potential solution, they are now largely ineffective unless established for reasons entirely separate from protecting assets from care costs.
Tax Deductions for Investors: Navigating the Grey Areas
While the looming care cost issue is a significant concern, understanding allowable tax deductions for investment-related expenses is a more immediate financial benefit. The IRD allows deductions for costs “incurred in deriving income,” but the line can be blurry. Can you claim the cost of a Shareholders Association membership or investment magazines? The answer, according to Deloitte tax partner Robyn Walker, depends on whether you’re actively generating taxable income from your investments. If your investments are simply held for long-term growth without active trading, these expenses are unlikely to be deductible. However, if you’re actively buying and selling shares, generating a profit, and the subscription or magazine directly aids that activity, a deduction may be possible. Remember, the IRD’s focus is on expenses directly linked to taxable income.
PAYE Income and Additional Expenses
For those primarily earning PAYE income, claiming deductions against secondary income streams is permissible. Expenses directly related to generating that secondary income – such as costs associated with a side hustle or investment income – can be offset against your tax liability. However, standard employment-related expenses, like work attire or commuting costs, remain non-deductible, as outlined in sections DA 1 and DA 2 of the Income Tax Act 2007.
The Future of Care Funding and Financial Planning
The current system places a significant burden on individuals to fund their own, or their partner’s, long-term care. With an aging population and increasing healthcare costs, this pressure is only likely to intensify. We can expect to see increased debate around alternative funding models for aged care, potentially including greater government support or mandatory insurance schemes. However, in the meantime, proactive financial planning is paramount. This includes openly discussing potential care needs with your partner, seeking professional financial advice, and understanding the implications of relationship property laws on your KiwiSaver savings.
Furthermore, the increasing complexity of tax deductions for investors suggests a need for greater clarity from the IRD. Simplified guidelines and readily accessible resources would empower investors to accurately claim legitimate expenses, reducing the risk of unintentional non-compliance.
What steps are you taking to protect your retirement savings in the face of rising care costs? Share your thoughts and strategies in the comments below!
