Transfer UK pension to NZ: Pros and Cons
If you have lived and worked in the UK, and accumulated a UK pension, you might be facing a big decision regarding that pension now you're in New Zealand. You can either leave it where it is, or you can move it over to New Zealand to a QROPS. The first question you should ask yourself is, 'Where am I going to retire?' If the answer is New Zealand, you need to consider whether moving it over is the right thing for you to do financially. There is no single correct answer for everyone. The best option depends entirely on your personal circumstances, your long term plans, and your attitude to risk. In this article, we will provide a balanced comparison of each option to help you understand the pros and cons of each option.
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First Things First: What is a QROPS?
A QROPS is an overseas pension scheme recognised by HMRC. It stands for Qualifying Recognised Overseas Pension Scheme. If you want to transfer your pension out of the UK, it must be moved to a QROPS to avoid large tax penalties. QROPS are non-UK pension schemes that meet certain conditions and criteria set by the country they are established in. They notify HMRC that they meet these standards and will also notify them of certain activities, like benefit drawings. You can transfer your pension to a non-QROPS but that could result in fees of up to 55% of the transfer value. It is important to know that standard KiwiSaver schemes do not qualify as a QROPS.
Before we jump into the pros, let's define some terms you have likely come across when talking pensions.
Portfolio Investment Entities (PIE). This is a type of investment fund in New Zealand that pools money from investors to invest in assets such as shares, bonds and property. Investment earnings are generally taxed at your Prescribed Investor Rate (PIR), which is capped at 28% for individuals. Some KiwiSaver providers are PIE's. Managed schemes can choose to become PIEs and there are different advantages depending on the type of PIE - multi-rate, listed or specialised sub-types. Most QROPS are PIEs but be sure to verify this as part of your due diligence.
Prescribed Investor Rate (PIR). This is the personal tax rate that is applied to any income earned from a PIE. Your personal PIR is based on your taxable income (excluding PIE income) and your total taxable income (including PIE income) over the previous two tax years. PIR is capped at 28%.
Transfer UK pension to NZ QROPS: The Pros
There are several compelling reasons why it might be a smart financial decision to transfer your UK pension to New Zealand. We list some of the more commonly considered below but individual conditions and goals still have the strongest influence over the final decision. Be sure to consider all factors relevant to you and your circumstances.
Simplified Financial Life and Currency Control
If you are planning to retire in New Zealand, bringing your pension here consolidates your retirement savings in the same country you are intending to stay. This makes it easier to manage your finances, track your investments and model your retirement more easily. If you choose a provider who allows you to control the currency that your pension is held in, you can convert it to NZD, reducing your vulnerability to unpredictable currency fluctuations and foreign exchange rates with the British Pound.
Tax-Free Withdrawals in Retirement
A significant advantage of a QROPS is the tax treatment of withdrawals. In the UK, your pension is not taxed 'on the way in' and neither are you taxed on the growth, but you are taxed on your withdrawals. In New Zealand, we are pretty much the opposite. We get taxed 'on the way in' and we are taxed on growth too, but we do not pay tax on withdrawals during retirement which is when we need our money the most.
PIR Tax Rate
Once your pension is in an NZ QROPS, the investment growth within the scheme is typically taxed at your PIR. This is capped at 28% which is preferable to the income tax rate applicable to higher earners.
The Four-Year Exemption Window
If you transfer your UK pension to a NZ QROPS within the first four years of becoming a New Zealand tax resident, the transfer itself is generally free of New Zealand income tax. This is a very good financial incentive to act early. If you transfer after this window, a portion of the transfer may become taxable and this portion becomes bigger every year. The schedule method is the default way to calculate New Zealand income tax on lump-sum withdrawals or transfers from a Foreign superannuation scheme after your 4-year tax exemption period ends. You can learn more about the Schedule Method here
More Flexible Estate Planning
Unlike many UK schemes that limit benefits to a spouse, a QROPS allows the full value of your pension to form part of your estate. This means you can pass the remaining funds on to any beneficiary you choose.
Transfer UK pension to NZ QROPS: The Cons
For some people, leaving the pension in the UK is the safer and more appropriate choice. This will largely depend on what type of pension they are in and where they are planning on living long term.
The Security of Guaranteed Income
If you hold a defined benefit (final salary) pension, transferring to New Zealand could offer greater flexibility and control over your retirement savings. These pensions typically provide a guaranteed income for life, often with some inflation protection. However, transferring allows you to exchange that future income for a Cash Equivalent Transfer Value (CETV), giving you a lump sum that can be invested and managed to suit your retirement goals. This may provide greater flexibility over withdrawals, more investment options and the potential to pass remaining funds to your beneficiaries.
Uncertainty Over Your Retirement Plan
If you’re uncertain where you will end up retiring, moving your pension before you have decided carries a risk. Although there are exceptions, there is a 5 year rule in which you will incur an over seas transfer charge if you do not remain in New Zealand for 5 tax years after your pension has been transferred.
Making the Decision: What is Best for You?
The decision is ultimately a personal one. You might consider transferring if you are certain that you will remain a New Zealand resident for the long term, you are still within your first four years of New Zealand tax residency, and you value the flexibility and tax benefits of a QROPS. You might consider leaving your pension in the UK if you hold a defined benefit pension, you are uncertain about your long-term plans or if your pension pot is on the smaller side and would benefit from the lower management fees.
You can navigate the pros and cons of transferring your UK pension to New Zealand by yourself. There are plenty of resources alongside this article to help you consider what is best for you. But we always recommend seeking help from an adviser, so you don't accidentally fall into the many pitfalls that surround international pension transfers. We would love to hear from you but if you decide to seek help elsewhere, be sure to check out our checklist of fundamentals you need to ensure your adviser, and their FAP, meet all the requirements for a suitable financial partner. We want to also note that we are not tax advisers. We discuss several tax topics in this article so it is important to affirm the importance of seeking advice from qualified tax advisers for accurate information.
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