As the deadline approaches for the soon to be implemented Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill , the number of enquiries has increased dramatically according to UK Pension specialist and Authorised Financial Adviser, Dai Eveleigh of First Capital Financial Services. The tax bill, currently before Parliament, aims to simplify the tax obligations of New Zealand tax residents who transfer retirement savings to NZ, with migrants from the UK and returning Kiwis the largest group affected.
In recognition of the lengthy process of completing the transfer of funds from one country to another, Revenue Minister Todd McClay has announced a small concession to provide greater choice to individuals who decide to transfer their foreign superannuation before 1 April 2014:
“For transfers or withdrawals before 1 April 2014, a person can either calculate the actual amount of tax payable under the rules at the time or simply apply the 15 per cent option. People who choose the 15 per cent option can include 15 per cent of their transferred or withdrawn foreign superannuation in their 2013–14 or 2014–15 income tax return and have their tax rate applied to that amount.”
The changes extend the availability of the 15 per cent option to those whose funds haven’t actually been transferred to New Zealand before 1 April 2014, but who can show they have lodged an application before that date.
The 15 per cent option is a simplistic method of satisfying tax obligations for transfers dating back to 2000, however there are other methods such as the Foreign Income Fund rules (FIF) which could result in a better outcome from a tax point of view, according to Mr Eveleigh. “Generally, if you have lived in New Zealand for over 10 years and you transfer your pension fund before the 1st of April 2014, the amnesty is likely to produce the best result in meeting your tax obligations. However for shorter timeframes or if you can show losses, which is quite common due to the fall in the New Zealand dollar, then the FIF rules could work in your favour.”
“British expats are rushing to beat the deadline, so the Ministers announcement is welcomed, however the inaccurate and false information in the marketplace is alarming and could end in many expats making poor or wrong decisions” said Mr Eveleigh. “Investors with pension savings in the UK should consult an accountant to consider their tax position under the existing rules and also under the future rules and be fully informed before making a final decision.”
“A pension transfer is not the most suitable advice for every situation. Some pensions have guarantees which are incredibly valuable or some even have penalties in the fine print, it’s important to fully consider all relevant factors.”
A pension transfer from the UK must be placed in a Qualifying Overseas Pension Scheme (QROPS) which has been registered with HM Revenue and Customs, the UK tax authority. There are 42 New Zealand schemes on the recognised list produced by HMRC yet only two out of the five default Kiwisaver providers are permitted to accept transfers.
“It’s rare for us to recommend clients transfer a UK pension scheme into a KiwiSaver plan” said Mr Eveleigh. “Our preference is to transfer to a New Zealand QROPS which provides more flexibility and less likelihood of tax penalties in the event that the client returns to the UK before retirement.”
“If a client transfers funds into KiwiSaver from a UK pension, then returns to live in the UK and makes a withdrawal from their KiwiSaver fund, they will trigger an unauthorised withdrawal penalty of 55 per cent payable to the UK tax office. This is a complicated area of financial planning and a scandal waiting to happen, it’s imperative to obtain good advice.”