Transferring your UK Pension to New Zealand
The TAX-FREE Window
Transferring your UK Pension to New Zealand - The TAX-FREE Window
Did you know that If you are looking to transfer your UK Pension funds to New Zealand, you only have a 4-year window in which you can do this FREE OF TAX? Every year that the transfer is delayed, your tax liability increases.
In this article, we will cover the general rules involving the tax treatment of Superannuation schemes and also the tax implications of moving a UK Pension to New Zealand.
Let us start by giving you a brief understanding of how tax works on existing Superannuation funds for Kiwi residents.
The tax applies to the ‘Applicable Fund Earnings’ within the fund, which in other words is the investment growth achieved within your Superannuation Fund. The fund earnings are calculated monthly and taxed in line with your Prescribed Investor Rate (PIR). In UK terms, your PIR is the NZ equivalent of your UK Income Tax Rate.
Let's take an example
David has an existing NZ Superannuation Fund with a value of $80,000 at the start of the financial year. By the end of the financial year, it grew in value to $100,000 (by $20,000). This means that the ‘Applicable Fund Earnings’ for the year, is $20,000 and this is the amount that would be taxed in line with David’s Prescribed Investor Rate within the fund.
Now that you have an idea of taxation on existing NZ Superannuation funds, let’s move on to the tax treatment of UK Pension funds being transferred to New Zealand.
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UK Pension funds are classed as ‘Foreign Investments’ in New Zealand, and are taxed if they are transferred after the 4 years ‘Transitional Residency Period’. This 4 year period begins on the date you officially become an NZ tax resident. So, if you have UK pension funds, and you are still within the 4 years transitional residency period, then you are safe in the knowledge that you will not be subject to a tax charge when you transfer your funds to NZ. If you transfer your UK pension after this 4 year period, then you will be liable to a tax charge which continues to rise the longer you wait to take action.
So now you are probably wondering what are the rates of tax applied when transferring your UK pension funds to New Zealand AFTER the 4 year transitional residency period?
The Taxation Increments Table below details the rates that would apply:
| Schedule Year | Schedule Year Fraction | Schedule Year | Schedule Year Fraction |
|---|---|---|---|
| 1 | 4.76% | 14 | 60.27% |
| 2 | 9.45% | 15 | 64.08% |
| 3 | 14.06% | 16 | 67.84% |
| 4 | 18.60% | 17 | 71.53% |
| 5 | 23.07% | 18 | 75.17% |
| 6 | 27.47% | 19 | 78.75% |
| 7 | 31.80% | 20 | 82.28% |
| 8 | 36.06% | 21 | 85.74% |
| 9 | 40.26% | 22 | 89.16% |
| 10 | 44.39% | 23 | 92.58% |
| 11 | 48.45% | 24 | 95.58% |
| 12 | 52.45% | 25 | 99.08% |
| 13 | 56.39% | 26+ | 100% |
John has been living in New Zealand now for 8 years and he has finally got round to dealing with the transfer of his UK Pension. The pension is valued at $100,000.
During the first 4 years living in New Zealand, John was classed as a ‘Transitional Tax Resident’ which means that he does not pay tax during that period. Therefore, from the 8 years of living in NZ, he has a 4-year tax liability. Based on the tax rates above, John is subject to a tax charge of 18.6% of the $100,000 he transferred to NZ. $18,600 would, therefore, be the calculated tax charge, which is added to his taxable income and taxed in line with his Prescribed Investor Rate.
John did not realise this tax charge would apply, furthermore, he did not realise that the tax liability cannot be paid from his pension fund directly. It must be paid from funds in his personal bank account. If only he transferred his UK Pension within the first 4 years of becoming an NZ resident, then he would not have been hit with any tax liability.
If John waited any longer to transfer his UK pension, his tax liability would continue to rise.
There have been many cases where people have waited until their retirement age to transfer their UK Pension and have been subject to a tax charge of 100% of the value of their UK pension. You can imagine the devastation caused to these individuals as a result of not being aware of the tax laws.
So now you understand that if you have pension funds held in the UK and you are still within your 4 years transitional residency period, then your time is running out to transfer the funds TAX-free and you should take action as soon as possible!
If you have pension funds in the UK that you would like to transfer to New Zealand, then call us today and we would be happy to guide you through the process and answer any questions you may have.
This article does not contain personal or financial advice. It is provided for general information only and does not take into account your personal objectives, financial situation or needs. IVCM is not authorized to provide you with any personal or financial advice.
If you require financial any advice then you must make sure that you obtain advice from a suitably qualified financial adviser.
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