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Tax considerations when transferring a UK Pension Scheme

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Transferring a UK Pension Scheme can have various tax consequences, and it’s essential to understand these implications before making any decisions.

In May 2014, the Inland Revenue Department in New Zealand changed the way benefits held in overseas pension arrangements were taxed. Previously, it was the obligation of the New Zealand tax resident to declare the value of their benefits every year in their New Zealand tax return. In the case of the UK, while benefits were not subject to tax whilst a tax resident in the UK, they were subject to tax once you became a New Zealand tax resident.

Due to the complexity of obtaining valuations every year, particularly for defined benefit pension schemes, these pension schemes were often not included in New Zealand tax returns. Acknowledging this, the Inland Revenue Department introduced new tax rules for foreign superannuation lump sums. Rather than declaring the value of the pension scheme every year and returning this in your tax return each year, you are now taxed on a “receipt” basis.

The amount of tax liable for payment on receipt of the benefits in New Zealand is generally calculated by what is termed the schedule method. This calculates the percentage of the lump sum received liable for tax based on your number of years of residency in New Zealand.

First off, there is a four-year lump sum exemption period that applies and starts from the date you become a New Zealand resident. This means that if you have moved to New Zealand and transferred your pension funds here within your first 4 years of residency, there is no tax payable. It is also important to note that if transferring the funds to a Qualifying Recognised Overseas Pension Scheme (QROPS) in New Zealand, there is also no tax payable in the UK.

After the four-year exemption period has lapsed, then any tax liability is calculated using the schedule method. As an example, you moved to New Zealand in September 2013. You transferred your pension pot from the UK in 2023 therefore have been a New Zealand tax resident for 10 years. The value of your pension funds is $100,000. Allowing for the four-year exemption period, the tax is calculated based on 6 years of residency. Using the schedule method, the percentage of the funds liable for tax based on 6 years is 27.47%. Therefore, the calculation would be $100,000 x 27.47% = $27,470. This amount is included in your tax return as overseas income and then taxed at your marginal tax rate. So if you are a 33% taxpayer then the amount of tax payable is $27,470 @ 33% = $9,065.10.

If you choose to receive a pension from the UK, it will be treated as 100% taxable income in New Zealand. Once you have transferred your funds into a New Zealand QROPS superannuation scheme, drawings are deemed to be capital and are not treated as taxable income.

So what are the other considerations? You have full access to your pension funds from age 55 which aligns with the minimum age for pension withdrawals in the UK. However, an important point to note is that from 6 April 2028, the minimum age for withdrawal in the UK will move to age 57. Legislation to implement this change is yet to be passed but could apply retroactively. The UK Government has not confirmed how the change will be implemented, including potential exceptions and how it may impact QROPS as to whether the minimum age of 55 might still apply to existing scheme members who have transferred before that date.

In the case of a defined benefit scheme, if you haven’t transferred your UK pension before you die, your spouse might be paid half of the pension you would have received from the UK. If you both die, your pension dies with you, unless you are leaving qualifying dependent children. If you have transferred your pension benefits to a QROPS, then the whole investment portfolio becomes part of your estate and is passed on according to the instructions in your Will.

This information is generic in nature and does not represent tax advice. As always, we recommend you seek professional tax advice before making any transfer of UK pension funds. However, for more information on the transfer process and investment options in New Zealand, please feel free to contact Jeremy Simpson at Hamilton Hindin and Greene.

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