A guide to UK pension transfers

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The decision to transfer a UK pension to a qualified New Zealand superannuation scheme could be one of the biggest and most important financial decisions that new immigrants will make.

Friday, July 24th 2009, 3:40PM 1 Comment

By Clive Atkins

Making the right decision can be difficult because many factors need to be considered. The advice of a qualified and experienced financial adviser is therefore an excellent place to start when considering transferring pension funds to New Zealand.

To help in this complex area, a number of companies in New Zealand, including AXA*, have specialist transfer teams who are available to assist and help advisers in both the transfer process and answering the more technical questions.

The following is designed to give an overview of why people may consider transferring and some insight into some of the current rules surrounding the legislation. So whether your client is immigrating to NZ or an ex-pat returning home after years away in the UK the following will be an important read.

Transferring a pension to a New Zealand Qualifying Recognised Overseas Pension Scheme (QROPS) approved by Her Majesty's Revenue and Customs (HMRC) can give your client.

More flexibility in accessing pension funds
If your client's pension fund remains in the UK, certain restrictions are applied even when they are entitled to take their benefits. Normally the maximum amount of tax free cash they can withdraw is limited to 25% of pension fund value, although some schemes established before April 2006 could pay a higher figure.

The balance of the fund must be used to provide an income. Although legislation changes now mean that an annuity does not have to be purchased until age 75 clients are still restricted as to the minimum and maximum amounts that can be "drawn down" from their pension funds. The amount they can draw down is also taxed as earned income at the client's marginal rate.

By age 75, an annuity must be purchased. Of course if interest rates remain at current low levels the retirement income generated would be correspondingly low. For example, a pension fund of GBP 100,000 pounds would currently give an approx lifetime income of only GBP 5,600pa gross.

If the monies are in New Zealand you can, subject to certain requirements, take part of the funds as Tax Free Cash. There is also no restriction, apart from fund size, on the amount of income that you can take.

Control
A qualifying New Zealand pension scheme will usually give your client much greater control as to how they use their pension funds once they become entitled to withdraw them.

Taking benefits in the UK and then transferring the money to New Zealand, would subject your client's retirement income to exchange rate fluctuations. This could make a huge difference to the amount of retirement income they actually receive, over the long term.

Adaptability
Financial circumstances change as peoples lives change, whether it is because of a marriage, children, buying a home or a new business venture, or other life changing events, it is preferable that your clients have some flexibility in how they use their pension money when they become entitled to it.

By transferring pension funds to a New Zealand qualified pension scheme the restrictions imposed in the UK, in relation to how pension funds can be used at retirement age will not apply giving your clients the opportunity to adapt to any unforeseen financial situations. 

As mentioned earlier, UK legislation states that once the tax free cash has been taken, an annuity must be purchased with the remaining pension fund monies no later than age 75.

Unfortunately, this means that on death, the annuity dies with annuitant and the unused funds are retained by the annuity provider and lost to the annuitant's estate.

In New Zealand we have the freedom to invest your pension withdrawal money in income generating investments which on death can be passed to the beneficiaries of the estate.

Tax efficiency - Foreign Investment Fund (FIF) treatment
The IRD currently categorise UK pension funds as a FIF. Therefore, it may be possible that clients, who are resident for tax purposes in New Zealand, may be subject to a New Zealand tax charge on investment income received by the UK fund.

By moving a UK pension to a qualified New Zealand pension fund, the NZ pension fund would pay the tax rather than the individual. We suggest you and you clients refer the matter to a tax expert before making a decision. 

Lifetime allowances
A significant change to pension legislation in the UK was the introduction of "lifetime allowances". Prior to April 2006 individuals were restricted on the amount that could be contributed to a pension scheme based upon their individual salary.

However, although that restriction has now been removed there is now a limit on the amount of "tax free" contributions that can be used to purchase pension benefits.

The current lifetime limit is GBP1.75 million. At the time of a pension payment, a recovery charge will be applied to the value of retirement benefits in excess of the Lifetime Allowance. The actual amount will depend on how the excess is paid.

If the excess is paid in the form of a pension or annuity, the excess will be subject to a 25% tax charge and the income will be subject to Income Tax. For example, if you had a pension fund of £1.9 million in 2006, £400,000 would be subject to the tax charge of 25% (tax due £100,000) leaving £1.8 million to provide an income.

If the excess is paid as a lump sum, it will be subject to a one-off 55% recovery charge. For example, if you had a pension fund of £1.9 million in 2006, £400,000 would be subject to the tax charge of 55% (tax due £220,000), leaving a lump sum of £180,000.Your pension scheme's rules may dictate how the excess is paid - either as pension or as a lump sum. Transferring benefits to a NZ Pension fund creates a "Benefit Crystallisation Event" and no longer subjects the pension fund to the Lifetime allowance rules.

Availability
A number of companies in New Zealand, including AXA, have specialist transfer teams who are available and willing to help in this complex area

However, the most important question to ask a client is why are they transferring.

The temptation of accessing capital may be a key factor. If so this is time to recap on the reasons why the scheme was originally taken and emphasise the benefits of retirement saving.

If they do decide to bring the money across outlining what they are giving up, in terms of guarantees is also fundamental to the advice process ie: the qualifying New Zealand pension scheme will not necessarily provide clients with:

• Guaranteed Minimum Pensions (GMP)
• Protected Rights
• Discretionary Trustee Increases
• Widows pensions
• The certainty that an annuity gives
• Protection from Inheritance tax
• Safeguard Rights-Pensions and Divorce

Timing of withdrawals
Once your client's pension has been transferred to a qualified New Zealand pension fund the timing of when they draw on the funds is crucial.

Getting it wrong could cost them up to 70% of the fund transferred.

The most important factor is that they will have to have been a "non resident for UK tax purposes" for at least five complete UK tax years prior to the withdrawal, to avoid the UK un-authorised withdrawal penalties.

Inheritance Tax
Under current UK tax law the transfer is not itself a chargeable transaction for IHT purposes. However, you should note that if you remain domiciled in the UK after you transfer to a qualifying New Zealand pension fund, your pension monies will form part of your worldwide assets for the purposes of IHT.

As a QROPS is not a UK registered pension scheme the funds in it will be caught by paragraphs 57 and 58 of schedule 36 to FA 2004 (and the transitional relieving provisions will not apply). If the funds have a UK source they will be "relevant property" for the purposes of the IHT regime in Chapter III, Part III IHTA.

This means, broadly speaking, that there will be IHT charges on the current value of the funds every 10 years and on any payments of capital out of the scheme. If the UK domiciled individual died whilst entitled to a pension from the QROPS there could be an IHT charge on the funds being held in the scheme to produce that pension income.

It is therefore vital that a client's domicile status is discussed as part of the advice process, not only for avoiding potential tax on the transfer but also on the rest of their NZ estate. Many clients are not aware that if they keep their UK domicile they are subject to UK Inheritance tax on their worldwide assets.

As you can see, there are a number of issues and areas to be discussed with clients.

Expert tax advice should therefore be sought and an in depth analysis of the UK scheme should be undertaken, before advice on transferring is given.

The information in this article is given in good faith, is of a general nature, and has been derived from sources believed to be reliable and accurate at the time of preparation. The information and views in this article do not constitute advice.

You should always seek financial advice or other professional advice relevant to your personal circumstances before you make investment decisions. Neither AXA New Zealand nor any other member of the AXA global group of companies nor any other person involved in the preparation of this article accepts any liability for any information or views (including the accuracy or completeness thereof) contained in this article, or for any consequences flowing from its use.

*A disclosure statement is available on request and free of charge

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