My guest this week is Tony Chamberlain, director of GBPensions a firm specialising in U.K. pension transfers, Tony is an authorised financial advisor with over 30 years’ experience.
Morena, Tony, welcome to the podcast, great to have you on board. So how do pension transfers work? What sort of pensions are we talking about? Who are the people who are most likely to have these types of pensions?
Well, predominantly we deal with the transfer of U.K. pension schemes. We can assist in the transfer of pensions from other jurisdictions, but mainly the UK. They fall into two main categories, defined benefit, where the benefit is known in advance and defined contribution where only the contribution into the scheme is known.
New Zealand really only has defined contribution style schemes, but when we transfer from the UK both types of UK schemes can be treated in a similar manner and whether the defined benefit or defined contribution, they would end up in a New Zealand scheme that is a defined contribution scheme.
And so, the distinction from a tax perspective is a vital one, because in Britain, the position was exempt, exempt tax. In other words, you got tax deductions for contributing to the schemes the schemes grew tax free. But then you got taxed on the way out, whereas New Zealand went the other way, tax, tax, exempt. In other words, we make our contributions after tax in this country. These schemes are subject to tax and the normal taxing rules. And then but when you pull them out at the other end, it's tax free. And I think it would be fair to say that when you marry those two together and it becomes exempt, exempt, exempt Inland Revenue saw that as quite a huge problem.
What was your experience of Inland Revenue when this issue started to emerge about 12,13 years ago?
I think really Inland Revenue didn't have any respect or any patience for people bringing monies over from a UK scheme or schemes. The issue I have is that when you've lived and worked in the UK under the UK tax regime, you've never had to bother with declaring your pension scheme to the UK revenue. So when you come to New Zealand and find that that's what you should be doing, it’s completely alien to some. Why would you go out of your way to find out if you need to pay this tax, if it's something that you've never experienced in the past?
And Inland Revenue seemed to think that they were actually making sufficient efforts to alert people coming from the UK that they need to declare their pension schemes. They didn't really. And it’s unfair that they didn’t make it clear or apparent to people coming to the country that this needs to be done.
And Inland Revenue could even have a little bit of patience with people. This insistence that the New Zealand tax that has accumulated and be paid when the money is brought into New Zealand even before the individuals turn 55 and can access it is unfair. It’s wrong that the tax that is generated on an asset must be paid out of a person’s own pocket and the asset which generated the tax liability cannot be used to pay the liability. And to insist that the individual pay the tax out of their pocket because they can't access the fund before the age of 55, I think is unfair.
It would be nice to see Inland Revenue make some allowance to allow individuals to defer their tax and have it deducted from their schemes at 55 when they can legally access the funds and pay the liability.
Yeah, I mean, it's counterintuitive to people that they are being taxed on something they can't actually access, or the funds aren't available. Accrual taxation is conceptually, theoretically correct but it's a mystery to the layman. This is one of those areas where there's a massive assumption made around what people should know and what people actually did know.
I mean, there is now a clearer set of rules than what we first looked at this issue 12, 13 years ago. But I still struggle with the economic concept that people are bringing money into the country and are being taxed on that. But it seems to me that's economically idiotic, that we're taxing capital coming into the country, whereas the same people, for example, if they borrowed from an offshore bank to buy a house here, no issues.
I mean, I just find the whole thing the way we treated overseas pensions incorrect. And New Zealand's an outlier in this. My views on this are well known. Inland Revenue isn’t listening anymore because it's a nice little earner for them. Eventually when you have to design a special scheme because the ordinary rules don't work that, to me, is an example of a system where the fundamentals aren't working in the first place. But anyway, this one's been done to death, so moving on quickly.
Whether or not you disagree or agree with the tax itself, we could debate that all day. But I think as concession could still be given by Inland Revenue, that if the tax has been generated and the individual is liable to it, let the individual defer that tax until they are able to access the money from the fund and pay the tax. After all, it is the fund that has generated the tax. But at least let the individual defer the tax until they’re able to withdraw the tax from the fund. That's fair.
I couldn't agree more with you on that one. It's a very harsh treatment. And I know there was one case with a couple of intensive care specialist nurses who got hit with one of these liabilities in a really odd set of circumstances that triggered the charge. And they were in Auckland, but they sold up and moved to Nelson so they could realise the funds to pay the tax. And that is economic idiocy all round. We want skilled migrants. What are we doing? We just tax them so they go to another part of the country. So, Auckland, which short of these skilled migrants loses out. I mean, that really is a stunning piece of poor planning.
And, interestingly, just a quick aside, there's a lot of talk about the Green Party's poverty action plan, which has a wealth tax on this. One of the points that's not discussed, but they do address, is this very issue of people being asset rich and cash poor, say elderly people who might be living in a house mortgage free. Under the Green’s proposal the tax liability can roll up and basically be payable when they pass. And so someone there has thought conceptually about this very issue of someone is going to be taxed on something but without the cash to meet it.
This is a distinction which was could have been argued more, I feel, when the current foreign superannuation scheme legislation was going through. That is has the person really triggered income here because they have no legal right to that pension until they reach the right age. This is separate from the issue you know was happening way, way back prior to the introduction of the QROPS regime when there was some chicanery going on where people from Britain were able to transfer to schemes here and access funds before age 55. That leads us onto the QROPS regime: what is a QROPS and how does that work? When do we use these?
So, in essence, the British government launched the QROPS regime, which is Qualifying Recognised Overseas Pension Scheme in 2006. It was an amalgamation of old pension rules in the UK, brought together to tidy up the pension regime, which was getting very messy with constant changes.
And QROPS is a regime where if a pension scheme is established in an overseas jurisdiction outside the UK and registered in its home jurisdiction, and it could satisfy certain requirements of the British authorities, the overseas scheme would qualify for QROPS status.
For example, a QROPS can be a New Zealand registered pension scheme which satisfies various HM Revenue & Customs (HMRC) requirements in the UK that stipulate what can be withdrawn, when it can be withdrawn and has certain constraints on the scope of investments. And if the New Zealand scheme can satisfy HMRC’s requirements, it gets certification as a QROPS. It goes on the HMRC website and then you can effectively receive monies from UK pension schemes without any UK tax deductions being made. So it can be a straightforward transfer.
Critically KiwiSaver schemes can't be QROPS. They were specifically taken out of the regime, weren't they, because they didn't actually ever meet the requirements to be a QROPS.
That's right. What happened was that as the KiwiSaver regime was getting some some weight behind it in 2010, 2011 and 2012, some of the KiwiSaver providers thought, well, it's a good idea to try to get schemes into the QROPS regime, and that way we can receive funds from UK schemes.
Now we actually advised one company at the time that KiwiSaver rules could physically not satisfy the QROPS rules even though they were they were given QROPS status by HMRC. The KiwiSaver rules breached the QROPS rules. What was happening was HMRC were being sent information scheme documents and trust deeds from New Zealand KiwiSaver funds and just basically gave them a very quick glance and going “Yes you’re a bona fide overseas registered scheme so we can give you QROPS status.” HMRC was looking no further into the actual trust deeds and the rules around KiwiSaver.
It took them a couple of years and then they suddenly realised that, “Oh, hang on, the KiwiSaver rules because they allow withdrawal of funds before retirement age under hardship or to purchase a house can't comply with the QROPS rules because the QROPS rules do not allow funds to be paid out before retirement.” And so there was a cull when the British Government removed the list of approved QROPS for a month and when it reappeared again, every KiwiSaver had been removed.
So KiwiSaver funds never really satisfied the QROPS rules. There was some that were initially given the QROPS status and some transfers were made, but within a year or two once the HMRC realised what had happened it cancelled or removed every KiwiSaver from the QROPS approval. So those people in KiwiSaver who transferred are in the middle of quite a big bunfight because they really have got some issues.
I mean, this actually happened just as the legislation introducing the current taxing regime for foreign superannuation schemes, UK pension schemes, was going through in 2013. https://www.ird.govt.nz/income-tax/income-tax-for-individuals/types-of-individual-income/foreign-superannuation
And Inland Revenue here were very naive thinking HMRC would just bend the rules to suit it. I think serious questions could be asked about how Inland Revenue handled the whole thing. I think they saw it as a huge tax grab and weren’t too worried about if people had put it into KiwiSaver. And I know several people raised this issue at the time asking “You know, KiwiSaver funds may well not comply. Have you got UK sign off on it?”
Incidentally, that whole experience was something I've seen again recently where policy, which affects individuals and small businesses, doesn't actually have an effective force in consultation because the big boys, the big end of town, as it's called, the large law and accounting firms, they don't realise how significant the issue is. And I had one lawyer in a large law firm tell me said we didn't pay enough attention to this issue at the time. And since then, they've been scrambling to try and work something out with Inland Revenue and HMRC.
Anyway, we are where we are. And I mean, as you say, those people who did transfer into a KiwiSaver QROPS are really stuck because they can't move. They can't take out anything and have to sit it out until age 65. That was the other thing that slipped by. You know, you've transferred to a QROPS and you can withdraw it at age 55. But if it's in a KiwiSaver fund, you have to wait an extra 10 years. So I'd say there may be a few financial advisors that should be looking at their Professional Indemnity cover on the matter.
Well, I actually put a portion of blame to the insurance companies and their lawyers. They should have read the KiwiSaver legislation. They should have then read the QROPS legislation and seen that never the twain shall meet. They were just completely opposing pieces of legislation.
And HMRC were at fault in granting the QROPS status. This all happened after they had lost a big court case where they'd be made very silly. HMRC took a Singaporean QROPS to court Panthera about its incorrect status. When HMRC tried to impose an unauthorised withdrawal charge on the Panthera QROPS clients they complained that they would not have made the transfer if HMRC had not granted QROPS status. At the time of transfer they thought it was a QROPS. Eventually HMRC was forced to back down.
So as part of the repercussions of this HMRC decided to check their records, have a bit of a cull to make sure that every other scheme that they've given QROPS status to was entitled to that status. And they found the KiwiSaver funds didn’t qualify.
Oh no, not good. Another acronym which comes up in this area is SIPP what does SIPP stand for and how do you use them?
So, a SIPP is a Self-Invested Personal Pension and they come around in about 1993, 1994 in the UK. And basically, it is a personal pension similar to what most people in the UK have but it has wider investment scope. And what happened in 2015 is HMRC introduced a flexibility rule, which meant that instead of splitting the contributions between a 25% lump sum and a 75% portion which must be applied to purchase an annuity, from 2016, a SIPP could actually pay the remaining 75% portion as a lump sum as well.
And so, a SIPP effectively is a glorified pension scheme that now does not require the client to have to retain 75% of the fund to provide an income. They can now access the entire fund as a lump sum.
And there are some tax planning opportunities by using SIPPs for New Zealand individuals. And if we come back to the New Zealand tax, for example, where an individual is looking at transferring their UK scheme into a QROPS and they have already accumulated a New Zealand tax liability and they are younger than 55, they've got to pay that New Zealand tax liability out of their own pocket, as we've already discussed. But if the individual transfers to a SIPP, the tax ability does not become payable on demand in New Zealand because it's gone from one existing UK scheme to a SIPP which is also a UK scheme.
And so if the individual can transfer to a SIPP, they can benefit from some of the very high transfer values, specifically from defined benefit schemes which we are seeing and keep the funds in a defined contribution scheme, which is a SIPP, so that when the individual turns 55, they can access the proceeds in New Zealand. They can then deal with that New Zealand tax liability that they would have otherwise had to pay out of their pocket if they transferred their scheme to a New Zealand QROPS when they were, say, 50. So it's a case of the ability to defer the tax to a time when you actually have the funds to pay it.
The other thing is that some individuals don't know if they are going to retire in New Zealand. And so, if they have a SIPP and so they can go back to the UK without ever having to pay the New Zealand tax on transfer in the first place. So, a SIPP has got some tax planning angles it gives probably as many options as a QROPS. But it depends on the age of the individua, the size of the fund, what they want to do and what their future thoughts are going to be, where they going to retire.
You mentioned the rising value of defined benefit scheme. What's driving those values up, because you were talking pre-podcast about an example where the value went up £100,000 in 90 days.
As I said before, defined benefit schemes don't have a value until it comes to be calculated. The actuary, when he comes to calculate a transfer value has to use annuity rates given to him by GAD the UK Government Actuary’s Department. And annuity rates are based predominantly around Gilt yields in the UK plus some other factors.
Gilts being bonds, the equivalent of New Zealand Treasury bonds.
Yes. They actually started off as a piece of paper with a gilt edge, and that's how they got their name.
And so the actuary has to determine based on the pension that the individual was given under the defined benefit scheme what pot of money is a fair and reasonable amount for the individual to go and provide themselves with that amount of income based on gilt yields, bond yields.
And because we saw falling gilt yields just prior to Brexit. So that meant the transfer values were going up prior to Brexit quite steadily. Of course, we've then had the Covid-19 crisis and that has further reduced gilt yields, which means the cost to the scheme actuary in providing a guaranteed pension that's prescribed under a defined benefits scheme has gone up because they now need to buy more gilts to provide the same amount of income, which a defined benefit provides and has guaranteed. So transfer values have risen significantly.
And you're right, we had a case that just immediately prior to lockdown the guy obtained a transfer value of just over £300,000. But the client thought gilt yields were going to fall further because of the Covid-19 crisis. So he waited and requested another valuation three months later, and that's gone from £302,000 to £420,000. So in the space of about three months, he's made 33 percent profit. And the transfer values we're seeing are just phenomenally high compared to what they would have been a year ago.
So, these falling gilt yields are the main reason why defined benefit schemes are basically being phased out all across the UK. And aren’t some of the state schemes such as the NHS and Teachers schemes there are now some restrictions on transfers?
Yes, the statutory unfunded schemes, which are basically the defined benefit schemes of British government run departments such as the armed forces., the police force, the National Health Service, and civil service are defined benefits schemes. And clearly with Gilt yields falling, the cost of providing those defined benefits has gone through the roof. And because they are statutory unfunded schemes, that means that there is no pot of money accumulating to provide those benefits. The pension benefits to individuals within these schemes are paid out of the tax revenues collected by HMRC so that’s why they are called the statutory unfunded schemes. And so the UK Government is just seeing millions and millions of pounds going out of the door with people transferring their pension schemes. And they stopped it because it was just going to cost too much.
Moving on, how has Lockdown been for you? I’ve heard one or two interesting experiences from business owners.
Values went up, service levels went down. But I think unlike many businesses and I keep count our blessings, really, we were lucky. I think people were sitting at home twiddling their thumbs and got round to doing things they couldn’t do during their normal working life including going through their paperwork and realising that they had pension schemes from 10, 20 years ago.
So we were actually inundated with enquiries and one week was the busiest in terms of enquiries for at least five or six years. And it's been really eye-opening to see what people have got which they’d overlooked.
And that touches on a point I was going to raise, and we talked a little bit at the top of the podcast, how well aware are people of their New Zealand tax obligations in relation to these schemes?
Well, that comes back to the start of our conversation. They're not. Although I think the longer they're here the more they hear from other people who have got an inkling that there is an issue and tell them, ‘You know you've got tax to pay on your pension scheme? How long have you been here?”
But generally, people are completely ignorant to the fact that there's a New Zealand liability. They may have some recollection when they took their pensions out in the UK, that when they got to retirement, they might have to pay some UK tax on the pension. But about 90% of clients have no comprehension that they're going to have to pay New Zealand tax on their pension schemes.
Wow. Final question on something coming up. If the current government is re-elected, there's a proposal to increase the top tax rate to 39 percent on incomes over $180,000. Pension schemes when they come in, are taxed as a single lump sum. So, I guess the opportunity is for people to perhaps think about getting their money in now because they could face a significantly higher tax liability. Roughly how long does it take to transfer schemes?
Certainly defined benefit schemes are increasing in value and we’ve seen very few under £100,000, which is $200,000 more or less, which automatically breaks the new potential threshold. But there's a bit of a double edged sword. Covid-19 has caused defined benefit scheme values to rise. Unfortunately, it’s also caused the UK pensions industry to virtually grind to a halt.
So whereas we were saying to clients at the start of the year that the process to transfer a scheme from the UK will take six months or more, we can't really say that with any certainty now. So really, we've got to tell people it could take 9, 12 months to get the money out.
So if you want to try and make that 31st March 2021 deadline that we don't even know if it's actually going to come in people are really up against getting transfers completed before that legislation ever happens. It will take at least six months to complete a transfer and probably longer.
Well, on that bombshell, I think we'll leave it there. Thank you very much, Tony Chamberlain of GBPensions. It's been fascinating to hear the tale of what happens in the pension industry. Really, really helpful
That's it for this week. I'm Terry Baucher. And you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next week, Ka kite āno.
This article is a transcript of the September 25, 2020 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.
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