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Unlocking the tax impact of UK pension transfers

June 2024 - Tax Alert

By Kirsty Hallett, Ian Fay, Eleanor Meredith & Rachel McEleney

Most people who have lived and worked in the UK will have a UK pension plan. Therefore it is not uncommon for someone returning to, or looking to migrate to, New Zealand to consider transferring their UK pension entitlement into a New Zealand scheme. Luckily there are tax rules that make this a particularly attractive option to consider within your first four years of residing or returning to New Zealand. These tax rules mean the funds can be transferred into certain pension schemes recognised by the UK tax authority as ‘tax-free’. Once transferred into a New Zealand scheme, the funds can be withdrawn tax-free in New Zealand at the relevant retirement age.

However, care needs to be taken as it is not as simple as it sounds. There are some fishhooks to look out for.

  1. Transfers are not always tax-free in New Zealand. The amount that is taxable in New Zealand depends on how long the individual has been present in New Zealand at the time of withdrawal or transfer, with the added bonus that new migrants (or returning residents who accrued their rights in the foreign scheme whilst a non-resident) are generally able to utilise a four-year window and move their pension plans into New Zealand tax-free within that initial period. There are some criteria that need to be met to be able to utilise this exemption, with the most critical one being that the foreign scheme must have been acquired while you were non-resident for New Zealand tax purposes. In addition, the four-year exemption period will end earlier if the person ceases to be a tax resident during the initial four-year period.
  2. Seek financial advice. Tax is only one aspect to be taken into account in the decision-making process. How the funds will be invested once transferred, your expected returns, the exposure to various asset classes/currencies, and your future needs are examples of other matters that should be factored into the decision-making process. A financial advisor is best placed to guide you on these aspects.
  3. The transfer is not ‘tax-free’. While you may be able to transfer your pension into a New Zealand scheme tax-free if you are within the four-year exemption period, once the funds are invested in the New Zealand scheme, any investment returns will be taxed at the fund level, impacting your returns within the fund.  It may be preferable to retain the funds offshore where they may be accumulating tax-free, even when there may be a tax impost on withdrawal.
  4. New Zealand tax is only half the story. You also need to be mindful of the potential UK tax implications that can arise. If a transfer is made from a UK registered pension scheme (i.e. one that is tax approved) an unauthorised payment charge and surcharge at a combined tax rate of 55% is likely to apply, unless the receiving scheme is a Qualifying Recognised Overseas Pension Scheme (QROPS), even if the pension trustees can be persuaded to allow it (usually they will not as it would incur a sanction charge for the scheme). In addition, further transfer charges can apply if certain conditions are not met, or if funds are transferred or used inappropriately thereafter.

    QROPS are non-UK pension schemes that meet specific conditions in countries where they are established and have advised the UK tax authority (His Majesty’s Revenue and Customs or “HMRC”) that they meet those conditions and that they will notify HMRC of certain events (pension benefits being taken, for example). Additional tax charges can apply on subsequent events such as the pension benefits being drawn, if they are not drawn in an appropriate way, and you have not been non-resident in the UK for tax purposes for a period encompassing at least the current and the previous ten UK tax years. If you are aged at least 55, your pension pot derives from a defined contribution pension scheme, and you are drawing the pension as a lump sum and/or an annuity you will usually be able to withdraw the pension savings without adverse UK tax consequences. Recent reforms announced changing the way in which the UK taxes its residents are not expected to alter any of the above, although tax law is ever-changing and must be kept under review.

    There are also transfer charges which can apply if the transfer is made to a QROPS that is not in the country in which you are a tax resident (there are other possible carve-outs, but none that are likely to apply to anyone retiring in New Zealand). These can apply in addition to further transfers within the next five UK tax years. Where it applies the charge is at 25% of the fund. There is no minimum period over which funds have to be left in the QROPS for anyone aged at least 55, but there will be reporting requirements for the fund administrators if a distribution is taken during the “look back period”, and taxpayers must also have established that they are resident and treaty resident in New Zealand before benefits are drawn if they wish to take advantage of the double tax treaty.

    UK tax charges can also apply if the pension scheme invests the pension savings in an inappropriate way, most commonly in residential properties.

    The UK also has a temporary non-residence regime, which can result in pension income that was initially paid free of UK tax being taxed in the year the individual returns to the UK. This rule applies if they have been a non-UK resident for 5 years or less.

    The position is complex and care and expert advice are needed to navigate the UK tax rules without triggering unexpected UK tax consequences.
  5. It is a time-consuming process. Start planning early and expect the process to take several months from when you initially begin investigating making a transfer to the transfer taking effect. Not only is it necessary to do appropriate due diligence including seeking financial advice and tax advice regarding the transfer, there is a process that needs to be diligently followed to effect the transfer. It is important to engage with someone skilled in UK pension transfers with a good understanding of the administrative process and requirements from a UK perspective. Do your homework.
  6. Forward planning is essential. Individuals are only taxed in New Zealand on a withdrawal from their foreign pension plan, including a transfer into a New Zealand Scheme. Keep this in mind if you are only planning to be in New Zealand temporarily. It may be preferable to retain your UK pension and keep it out of the New Zealand tax base, however, this may have some different tax impacts down the track. It may not be the right decision in all cases to immediately transfer your funds even if you are trying to take advantage of the tax-free window.
  7. Cash flow – where the transfer does trigger a New Zealand tax liability, consideration needs to be given to how the liability will be settled as of course your funds are locked into the scheme. While early withdrawals are permitted under New Zealand tax legislation for the purposes of settling the liability arising on the transfer to the New Zealand scheme, as the rules currently stand, this could trigger some adverse UK tax implications. In most cases, the liability would need to be settled from funds sourced elsewhere.

If you are considering transferring a UK pension entitlement or withdrawing your entitlements we recommend you contact your usual Deloitte advisor to discuss further.

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