Cambridge Partners Knowledge Hub:

Should You Transfer Your UK Pension to NZ?

Making the best decision on if and when to transfer your UK pension is anything but straightforward. We've distilled the process into six steps.

 “I consider myself moderately financially literate, yet I confess to not being able to make the remotest sense of pensions.”

Andy Haldane Bank of England’s Chief Economist


Recent global economic volatility, uncertainty around Covid-19, and Brexit has made investors cautious, especially those living in NZ with UK pensions.

If you have a UK pension and are considering your options, we believe that you should evaluate your situation by following this six-step process:

  1. Understand what type of pension you have
  2. Think about where you want to live, both short and longer term
  3. Determine what your future needs are for income and capital
  4. Look at the options and weigh up the risks and benefits
  5. Make a decision!
  6. If transferring your pension to NZ, select a Qualifying Recognised Overseas Pension Scheme (QROPS) that provides flexibility around the investment choice and access to appropriate funds

1. Understand what type of pension you have
Pensions can be complex, but it’s important to get a handle on how much you have invested, where it’s invested and the type of pension you have.  Essentially, UK pension plans fall into one of the following two categories:

  • Defined Benefit (DB).  Also referred to as final salary pensions.  With a DB pension you will have a promised level of income from the scheme when you reach the designated retirement age.
  • Defined Contribution (DC).  There are lots of different types of DC pensions, but most are effectively a pot of money invested in a ‘tax privileged’ fund and with some rules around when you can access.  What you get back from a DC pension at retirement is not guaranteed and will depend on how the fund grows, the charges deducted, and how you turn the fund value into income. 

2. Think about where you want to live, both short and longer term
This step is self-explanatory.   If you qualify as a transitional tax resident (1) you will not have to pay NZ tax on any UK sourced investment income in NZ for up to four years.  This gives you have some time to figure things out. 

If you are not planning on living in NZ when you retire, transferring your pension to NZ probably isn’t going to be the best option. 

3. Determine what your future needs are for income and capital
You need to think about when you want to access the funds in your UK pension.  Is it sooner rather than later, or perhaps you are thinking of passing your funds to the next generation?  Are the funds an important part of your retirement plans, or just something extra? 

4. Look at the options and weigh up the risks and benefits
This is where things start to get a bit more complex.  NZ and UK pensions are subject to a range of different taxes.  The main taxes for NZ tax residents are summarised below.

    a. UK Pension Plans.  The income and capital gains on investments held in UK pension plans are not subject to tax.  The liability to tax generally occurs when you withdraw funds, transfer the benefits, or receive a regular income payment.

    b. UK Pension Plans – Regular Income. Under the NZ-UK Double Taxation Agreement (DTA), NZ has primary taxing authority over regular (periodic) pensions payments from both the UK Government and UK employment related pensions. These are taxed in NZ as ordinary income. No UK tax should be deducted at source.

    c. Pension Transfers or Lump Sum Withdrawals. Any lump sum withdrawals or transfers from a UK pension plan will be taxed in NZ upon receipt (2). The funds will be taxed as ordinary income using either the ‘prescribed schedule’ or ‘formula’ method.

    The prescribed schedule is the most common and is based on the number of tax years since your NZ tax residency was first established. The first four years are usually exempt, thereafter the proportion assessable to tax will increase each year to extent that after 30 years of becoming an NZ tax resident, the full amount transferred (i.e. 100%) will be assessable to NZ income tax. This is illustrated in the chart below.

    Using a simple worked example:

    • Let’s assume $1,000 is withdrawn after being NZ resident for 16 years
    • The first four years are exempt, and the schedule method applies for 12 years
    • This determines that 52.45% of the amount withdrawn is subject to tax
    • Assuming a NZ tax rate of 33% applies the tax payable will be approximately $173 ($1,000 x 0.5245 x 0.33) which equates to a tax rate of just over 17%

    UK Overseas Transfer Charge (OTC).  This is a form of anti-avoidance tax introduced by the UK from 9 March 2017.  The OTC is designed to stop individuals transferring pensions to a country with a low tax rate, whilst living in a different overseas country.
    The OTC is 25% of the amount transferred, but won’t apply if you transfer to an NZ Qualifying Registered Overseas Pension Schemes (QROPS) provided that you are NZ tax resident at the time of the QROPS transfer and remain a NZ tax resident for the following five complete UK tax years.

    For those permanently residing in NZ at the time of transfer, the OTC shouldn’t apply. But something you should be mindful of, if your circumstances change.

    e. UK Lifetime Allowance (LTA).  The LTA was introduced in 2006 to limit the funds you could build up in your UK pensions before being subject to a tax charge. 

    When you take the pension benefits or transfer to an overseas pension scheme a Benefit Crystallisation Event (BCE) occurs, which triggers a test against the LTA.  If your benefits are above the LTA (currently £1m) the excess will be liable to an LTA tax charge.  The rate applicable depends on how you take the benefits but is 55% for lump sum withdrawals.


    f. Tax charges on funds transferred and invested in NZ.  We won’t go over all the details here, but returns from funds invested in an NZ QROPS will subject to tax (i.e. the funds will no longer be tax-privileged like they were in the UK).  This means, that all other things being equal, the rate of return once in NZ will be lower, due to the loss of the tax privileges.  However, the longer you delay transferring, the tax on the transfer will increase, as described in c.) above.

    In order to weigh up the benefits you should consider how these taxes will impact your future pension value.  This is where working with an adviser can help and enable you to understand the tax issues and model what your pension funds could be worth if you were to transfer now, later or if they are left in the UK.

    Please note, if you have a DB pension plan (or a DC pension that has ‘safeguarded benefits’) with a transfer value of more than £30,000, you will be required to obtain pension transfer advice from a registered UK adviser.  Cambridge Partners has connections with advisers in the UK and can help organise this work, or you are free to nominate a UK adviser of your choosing who is qualified to undertake this work.

5. Make a decision
If you have done your thinking and planning, this is where you need to put your plans into action.  Whilst it’s important to gather all the information and assess all your options, ultimately you need to make a decision.  Continued procrastination is not allowed!

6. Select a QROPS in NZ
There are a variety of QROPS in NZ to choose from with different charges, investment options and access terms. 

If you know where to look, information about different QROPS is generally available online, but this is where working with an adviser experienced in this market can help.  They can review the market for you and find a QROPS that meets your needs, as well as explaining all the charges and fees, and assist you with all the paperwork.

For a no obligation initial discussion, please speak to one of our experienced advisers.


Notes

  1. Transitional resident.  Generally moving to NZ for the first time or have not been NZ resident in the last 10 years. You can only be a transitional resident once.
  2. Withdrawals or transfers from a UK Pension Plan will be subject to tax as ordinary income under the prescribed schedule or formula method.  However, if you have been treating your UK pension for tax purposes as a Foreign Investment Fund (FIF), prior to 2015, then you have the option of continuing to use the FIF method.
  3. All the information here is of a general nature and should not be considered personalised advice.
  4. For personalised advice, please speak to your adviser, or one of our experts from the Cambridge Team.
Ashley Salt

Ashley Salt

Ashley has worked with a wide range of domestic and international clients to help them navigate and understand their New Zealand tax obligations. She has worked extensively in taxation, including ten years with KPMG.
James Smith

James Smith

Jim has a broad range of experience in advising private clients and consulting to large institutional pension funds. He is a qualified Actuary, Chartered Financial Analyst, as well as being a Chartered Financial Planner and a Fellow of the UK’s Personal Finance Society.

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