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The UK regulations
The major change that shook up
UK pension regulations was pensions
simplification - known as "A-Day". These sweeping reforms happened on
6th April 2006. The
major changes to the rules from A-Day were:
-
Formalising overseas
transfers -
Previously the transfer process was ad hoc set by a combination of HMRC
guidance and pension provider policy. Now there are a binding set of
rules and processes that govern all transfers - providing more certainty
for all involved.
-
The establishment of
Qualifying Recognised Overseas Pension Schemes (QROPS)
- A QROPS is an overseas scheme that has been approved by the HMRC to
receive pension transfers from the UK. There are only a handful of
these in New Zealand. In order to qualify and remain a QROPS there
are stringent rules that must continually be met by the overseas scheme.
If the overseas scheme loses its QROPS status during your pension transfer
you will be liable for 55% tax on the fund value.
-
Tax penalties for not
transferring to a QROPS scheme - Failure to transfer into a QROPS will
mean a 55% penalty tax charge on your full fund value. You must be
careful to therefore ensure the provider you select will remain QROPS
registered for the duration of your pension transfer.
-
Relaxation of residency and
work requirements - You no longer need to be tax resident and/or
working in the same country as the country in which the QROPS is based.
This means that anyone with a UK scheme that no longer lives in the UK can
transfer to New Zealand and enjoy all the benefits.
Click here to find out more.
In fact it is not necessary to emigrate in order to transfer benefits
from a UK Registered Pension Scheme to a Qualifying Recognised Overseas
Pension Scheme. It is even possible to transfer benefits while remaining
resident in the UK.
You can now also be working for an overseas branch of a UK employer.
The test is based solely on tax residency.
-
Five tax years rule -
After you have transferred your pension to a QROPS the funds remain
subject to the UK tax charge of 55% if:
1. Benefits are taken at a time or in a format that would not be allowed
for a UK pension scheme, and
2. At the time of payment, the individual had been tax-resident in the UK
at any time in that UK tax year or any of the previous five UK tax years.
If you have not been tax resident in the UK in either the current or any
of the previous five tax years you can withdraw your funds with no tax.
Note that liability depends on recent UK residence for tax purposes and
not the period elapsed since the transfer overseas.
The individual, not the QROPS, is liable for any Unauthorised Payments
Charge but the QROPS is responsible for complying with their undertaking
to report benefit payments to HMRC.
-
The lifetime allowance rule
- The lifetime allowance is a cap on tax free pension savings and that cap
increases over time (click
here for details) - the current cap is £1.65 million. A
transfer payment to an overseas scheme is tested against the lifetime
allowance. If the transfer exceeds the individual’s remaining Lifetime
Allowance a charge of 25% is applied to the amount in excess of the
Lifetime Allowance. Typically, the UK scheme would withhold this charge at
the time of transfer.
This is an extremely important issue for a number of our clients who want
to ensure that they avoid this charge. Many have received an
enhanced lifetime allowance and you should contact us if you think that
you will need this additional protection.
-
The annual allowance -
There is no limit to how much individuals and employers can contribute to
UK pension schemes. However, there is a limit on the level of
contributions that may be made tax efficiently in any year. Individuals
can get tax relief on their own contributions to pension schemes up to
their full level of earnings (including self-employment income) or the
Annual Allowance (£225,000 for the tax year 2007/08) if less.
This is a significant departure from the previous earnings cap regime that
only allowed 17.5% of your income to be contributed each year tax free.
This creates an opportunity to more actively manage your tax and pension
affairs prior to leaving the UK (click
here for more details)
The NZ regulations
The
key features of the New Zealand legislation relevant to pension transfers
are:
-
New Zealand has a double
taxation treaty with the UK - This allows transfers to be made free of
any income tax and early withdrawal of the pension before retirement (as
long as the "Five years tax rule", mentioned above, is met).
-
Superannuation scheme
regulations in New Zealand - There is no statutory minimum age
requirement (outside of Kiwisaver) that you must met in New Zealand before
you can receive the benefits from your private retirement scheme savings.
This means that you can effectively immediately withdraw private
contributions (subject to the individual scheme rules).
-
Foreign Investment Fund
(FIF) rules - The recent changes in FIF rules remove all the previous
grey list countries. This means that the majority of investments
held in the UK no longer have a capital gains tax exemption in New
Zealand. It is possible that your UK held pension will be caught
under these regulations and if so you will be required to pay tax under
the fair dividend method. This is regardless of whether you realise
the gains or not, or even whether the fund increases or decreases in
value. This is a complex area and we recommend that you seek
professional advice from a tax expert.
-
Kiwisaver and other New
Zealand pension contributions need to be separated from your transfer
funds - It is important that contributions made in NZ into your NZ
pension scheme are not mixed with funds transferred from the UK because a
withdrawal of NZ sourced contributions from a mixed NZ/UK fund prior the
"Five years tax rule" being met gives rise to a 55% UK tax penalty
To read more about the
differences between UK pension schemes and NZ superannuation
click here
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