OVERSEAS PENSION: HOW DO I GET THE MONEY BACK TO NEW ZEALAND?
The problem is that you have an overseas pension, e.g., in the UK. You want to transfer it here. Why should you act soon? What do you do? How do you get the money back to New Zealand?
Act sooner rather than later
Well, in early 2014 a bill was approved by the NZ Parliament. It was called the Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill. What’s it all about? It will essentially affect people who hold overseas pensions or have transferred their pensions here since 2000.
How so? As Diana Clement wrote in the NZ Herald; “Hundreds of thousands of Kiwis are up for a tax king hit. And many of them have no idea it’s coming.” Why? She goes on to say “IRD found that 70% of a sample of 869 people who had transferred their pension here had evaded tax.”
Basically, if you have an overseas pension in any country except Australia, you could soon be paying tax at your marginal rate (anywhere from 10.5% to 33%) and then on up to 100% of the value of the pension. An amnesty was declared until April 1 2014. In other words, if you transferred your pension here before then, or if you’d already transferred since 2000 and not paid the correct tax, you would have only been taxed on 15% of your pre-1 April 2014 withdrawals at your marginal tax rate.*
So, what’s the IRD’s problem? Ms Clement goes on to say: “The issue for the IRD is that overseas pensions often grow tax-free, whereas KiwiSaver is taxed every year until retirement. [Their] argument is that New Zealand residents who hold these overseas pensions are at an unfair advantage over Kiwis who are paying into KiwiSaver.”
How is this different from the old regime?
The Herald article explains: “Under the old FIF (foreign investment fund) rules …New Zealand residents who held overseas pensions paid tax annually on the capital gains of the fund. The new rules will see people taxed only when they transfer money out of their UK pension as a lump sum or regular distribution.”
How will the tax be calculated?
It’ll all depend on how long you’ve been resident here. For the first four years after you move here your foreign income will generally be exempt from tax in NZ (see this article). However, after that, the percentage of the capital that is taxed then increases each year.
Here’s an example: Let’s project ourselves into the year 2025. You arrived in NZ in 2000, so you’ve now been here in NZ for 25 years. You never transferred your UK pension here, so you’re paying more and more tax on the capital amount each year. Now, you owe tax at your marginal rate on all of your withdrawals. That likely now equals about 33% of your entire overseas pension!
Ouch! What do I do?
Well, this is a specialist field, so we recommend a pension-transfer company. They’ll generally take a cut – perhaps up to 5% – of your pension when you transfer it here. If you pension is in the UK, it can only be transferred into approved managed funds, called QROPS (qualifying recognised overseas pensions schemes), or KiwiSaver. However, be careful: Some KiwiSaver funds are QROPS-approved, but there are also non-KiwiSaver QROPS. That’s why it’s good to get a reputable and experienced firm to handle the transfer.
But what about the currency?
You might be waiting for the GBP to rise. That might not happen for a while, according to industry experts. However, one thing you can do is move your UK pension into a sterling-denominated superannuation fund here rather than a New Zealand dollar-denominated fund. However, there are lots of “gotchas.” For any queries around these, and for other currencies, ask your pension-transfer company.
Should I really do something now? I think I’ll just wait and see
Well, you could. We are well past the 1 April 2014 deadline now so if you’re only just reading this today then the amnesty has been and gone.
My pension is an Australian one. What about that?
As the Herald explains: “The new tax does not apply to Australian Superannuation.” However, some feel this is a little unfair. For example, you go to South Africa, and contribute to a super fund there. Your brother goes to Oz and does the same, contributing the same amount. However, the IRD treats your pension differently from your brothers.
I’ve actually been using the FIF rules. Can I keep doing that?
Yes, you sure can. You might even be better off.
FIF? What’s that?
Basically, Foreign Investment Fund (FIF) rules are there to declare your foreign investments, as the name suggests. If you haven’t been using these up until now, the proposed new rules will effectively be compulsory.
* Assuming you choose the Schedule Method. There is an alternative called the Formula Method, wherein you are taxed on your actual investment gains while resident in NZ. However, there are certain conditions that need to be met if you wish to use this method, and it requires you to supply a ton of information, so we expect most will find this method unsuitable.
NB1: Note that you can calculate your taxable income based on the tax rules that you should have applied at the time (assuming you’ve been very naughty and kept quiet all these years). However, by the time you pay interest and penalties it might have been cheaper to take the 15% option!
NB2: As a general rule of thumb, if you’ve been in NZ for over 7 years you will possibly pay less tax if you had transferred your funds before 1 April 2014 than if you do so after that.
NB3: Information provided on this website is not intended to provide an exhaustive or comprehensive statement of tax law and should not be used as a substitute for considered written advice. All information published is subject to our standard terms and conditions and disclaimer
Image courtesy of Stuart Miles at FreeDigitalPhotos.net