New IRD tax proposals will severely impact tens of thousands of NZ resident UK pension holders

By Simon Swallow*

The IRD are proposing a new tax regime for foreign pension holders, mainly targeted at the over 250,000 British and Irish expats as well as the many thousands of Kiwi’s that have lived are worked in the UK.

The changes are targeted as clearing up the complicated rules on taxation of foreign pensions and eliminating the massive non-compliance with existing tax rules.

The new rules state that the longer you have been living in New Zealand the more relative tax you have to pay when you either draw a lump sum or transfer your pension to New Zealand.

Ultimately, up to 100% of the value of your UK pension could be treated as income in your tax return and taxed at your marginal tax rate – that is if you have been in New Zealand for 29 years or more.

What this means is that the longer you leave your pension in the UK the greater the amount of tax you will need to pay when you eventually bring those funds back to New Zealand either as income or by transferring them into a NZ superannuation scheme or KiwiSaver.

The IRD recognise that many people may be caught in a position where they want to move their pension to New Zealand but have not done so, so have created a special concessionary rate for all transfers of funds prior to 1 April 2014.

So anyone that transfers their UK pension to New Zealand prior to 1 April 2014 can elect to declare just 15% of the transfer as income.

Under the new proposed rules if someone has been in New Zealand for seven years they must declare 18.6% as income.

This figure climbs by approximately 4% a year for each additional after the seventh year.

To give you an idea of the tax savings of transferring your pension now versus after 1 April 2014 check your pension value and the amount of time you have spent back in NZ against the table below.

Tax saving from transferring your UK pension to NZ now versus after 1 April 2014
  Pension value (NZ Dollars)  
Years in NZ $ 25,000 $ 50,000 $ 100,000 $ 250,000
         
    7 297 594 1,188 2,970
    9 1,029 2,058 4,115 10,288
  11 1,737 3,475 6,950 17,375
  13 2,425 4,849 9,699 24,247
  15 3,090 6,179 12,359 30,896
  17 3,735 7,470 14,939 37,348
  19 4,359 8,719 17,437 43,593
  21 4,964 9,928 19,856 49,640
  23 5,551 11,101 22,202 55,506
  25  6,118  12,236  24,473  61,182
  27  6,668  13,337  26,674  66,685
  29 7,013 14,025 28,050 70,125

Many people with UK pensions may have lost touch with the amount of the pension might be worth when it comes to transferring the funds to New Zealand.

This might be because they retired on a final salary scheme where they get a yearly statement showing the benefits (such as £5,000 a year in pension benefits).

Often these benefits when converted into a cash equivalent transfer value (“CETV”) can yield a high value (due to current low annuity rates).  It is not unusual for the CETV’s to be 15 to 20 times the value of the annual benefits. 

Take for example Mr Worth who worked for an oil company for 12 years some thirty years ago. When he left his final pensionable salary was just shy of £9,000, not bad for back then.

Fast forward to 2013 and after taking into account inflation, really low interest rates in the UK and the fact that the pension scheme is fully funded and his pension has a transfer value of over £200,000 – that’s over 20 times what the final salary that he left on.

With an estimated $10 bln in UK pension benefits held by New Zealand resident expats and Kiwi’s that have returned there is likely to be a flood of interest in getting pensions into New Zealand.

However, the funds must be transferred into a Qualifying Recognised Overseas Pension Scheme (QROPS) in New Zealand of which there are a limited number.

As the average transfer time is 3 to 6 months for a UK pension to be transferred to New Zealand time is running out and with a limited capacity for New Zealand schemes to process these pensions capacity will be stretched going forward.

You can find out more about the legislation and its impact at http://qropsnz.com/nz-tax-legislation-options/

-------------------------------------------------------------------------------------------------

Simon Swallow is a director of Charter Square. You can contact him here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.