By Simon Swallow*
The KiwiSaver regime was introduced to help people build a financial nest egg through their own and employer’s contributions. To date it has been successful with most working aged New Zealander’s enrolled in KiwiSaver. KiwiSaver has created simplicity by:
- Members only being able to have one KiwiSaver provider at any time – meaning when someone looks at their KiwiSaver account they see the whole picture
- Making the transfer process between schemes easy for a member– this has recently sparked a battle for churning KiwiSaver customers
- Deducting funds at source, so retirement savings are consistently squirrelled away
So how applicable are KiwiSaver schemes as receiving schemes for UK pension transfers given that KiwiSaver is set up for expressly different purposes and that the KiwiSaver regime is methodologically different from the UK pensions regime (you can have multiple employment and personal pensions in the UK at any one time)?
Here we analyse some of the advantages and disadvantages of using a KiwiSaver scheme to receive your UK pension transfer and compare these to using a specifically designed New Zealand superannuation scheme that is registered as a qualifying recognised overseas pension schemes (QROPS). It seems fair to say that on the balance we would not recommend KiwiSaver schemes for QROPS as they have a considerably higher level of limitations
Flexible access to funds – but will the payments be unauthorised?
KiwiSaver schemes offer more payment flexibility than under UK regulations these are:
- First homebuyers withdrawal – which allows under circumstances some or all of the KiwiSaver funds to be withdrawn at the request of the member (although the scheme rules must allow it)
- Significant financial hardship – this is either through ill health or significant financial pressure. Now while the UK have regulations in respect of payments for ill health this are considerably more stringent than the KiwiSaver rules
- Moving overseas permanently - once the you have been overseas for a year you can withdraw your funds from the KiwiSaver scheme
- Full withdrawal of the funds at age 65 years old
While these flexible benefit structures may look appealing in the first instance, they could lead to unauthorised payment charges from the HMRC in the United Kingdom. The unauthorised payment charges are levied when a payment is made to a member who has been a tax resident in the UK in any of the five prior complete and consecutive UK tax years that would not be in accordance with UK pension payment regulations. The majority of the payments listed above are not allowable under UK pension legislation and so are unauthorised payments. Whether the member will receive a tax bill from the HMRC is dependent on how long they have been outside of the UK.
The UK doesn’t care whether the member has contributed non-transfer funds or not
Compounding the situation outlined above is the fact that the HMRC consider that any payment out of a QROPS is deemed to be UK transferred funds first. So despite the fact that a member may have contributed into their KiwiSaver scheme and only want to withdraw their own contributions (not the UK transferred funds) the HMRC will require the payment to be reported.
Therefore, transferring a UK pension scheme into KiwiSaver could significantly disadvantage the member as it would provide an unintended disincentive to withdraw their funds, even if they are eligible. This is particularly highlighted in the case where the individual leaves New Zealand after say three years but would still have to wait out their five UK tax year window before they were able to withdraw any funds.
Switching between KiwiSaver schemes can be fraught with danger – as not all KiwiSaver schemes are QROPS
As previously discussed, Inland Revenue designed the KiwiSaver switching process to be easy. Effectively, it allows the member to take control of their scheme and manage it between providers and workplaces (where workplaces have different schemes). So if the member exited one workplace scheme and joined another the transition would be seamless.
What happens if the next workplace scheme is not registered as a QROPS and the member has transferred their pension into their first workplace scheme? Then theoretically the first scheme cannot transfer the funds, as they would not be allowed to under their obligations as a QROPS. However, this would seem to significantly disadvantage the member as they could not receive the benefits of belonging to their new work place scheme (they would be forced to opt-out) all because they transferred their UK pension.
Worse still would be the position that the first KiwiSaver provider makes the transfer to the second KiwiSaver provider this would be an unauthorised payment under UK legislation. And if the member has not been outside of the UK for 5 complete and consecutive UK tax years, then the HMRC could levy the 55% unauthorised payment charge on the member. With transfers being conducted as a rate of two or three in a year at present – this situation could get dangerous for members in the future.
With four out of six of the default providers not being QROPS there is a real possibility of multiple unauthorised payment charges.
Upon leaving your employer with an employer Kiwisaver scheme – the Inland Revenue will provisionally allocate you to a default KiwiSaver scheme and give you 3 months to choose your own scheme. If you don't choose another scheme within 3 months, Inland Revenue will confirm your enrolment in the default scheme. Of the 6 default providers only two of them are registered as QROPS. Therefore, unwittingly the member could find themselves in a position where inaction leads to them being slapped with a 55% unauthorised payment charge.
KiwiSaver schemes are not designed to receive migrants overseas pension funds
There are numerous reasons why KiwiSaver schemes are not the ideal end investment option for UK pension transfers. Here we highlight some of the main disadvantages:
· Kiwi saver schemes do not offer pound sterling investment options. With the exchange rate at historical lows members are more inclined to want sterling denominated investments and investment options as well as New Zealand dollar options (as well as the ability to switch between these easily)
· Kiwisaver schemes are not zero-rate PIE’s so there are no tax advantages during transitional residency of joining KiwiSaver
· With the exception of Australia (pending that country's signing of the TransTasman Portability Agreement) KiwiSaver schemes do not allow for the transfer of the funds to another scheme overseas should the member emigrate from New Zealand and wish to emigrate their pension with them. The member can only cash in their funds (which as discussed would be an unauthorised payment and potentially subject to unauthorised member payment charges).
· KiwiSaver schemes are administered as KiwiSaver schemes and not as QROPS and are therefore less likely to keep up with rule changes in QROPS (or believe that they have to)
· KiwiSaver schemes do not allow for the payment of an entry or implementation fee to an adviser to be paid out of the transferred funds, hence the client would need to be charged a direct fee – many clients would find this difficult and would prefer fees to be paid out of their funds
· A well established QROPS will designate that 70% of the transferred value of your funds must be used to provide an ‘income for life’ with a minimum early retirement age of 55. Therefore, access to funds in a non-KiwiSaver QROPS is allowed a lot earlier than a KiwiSaver QROPS
So on balance, a transfer of a UK pensions into a KiwiSaver scheme has a significant number of risks attached unless both the advisor and member are fully aware of the implications and even then the transfer may jeopardise future options for the KiwiSaver member – a less than ideal situation.
*Simon Swallow is director of Charter Square NZ, a wholesale pension transfer business based in Wellington.