By Simon Swallow*
The KiwiSaver regime was introduced to help people build a financial nest egg through their own and employer’s contributions. To date it has been successful with most working aged New Zealander’s enrolled in KiwiSaver. KiwiSaver has created simplicity by:
- Members only being able to have one KiwiSaver provider at any time – meaning when someone looks at their KiwiSaver account they see the whole picture
- Making the transfer process between schemes easy for a member– this has recently sparked a battle for churning KiwiSaver customers
- Deducting funds at source, so retirement savings are consistently squirrelled away
So how applicable are KiwiSaver schemes as receiving schemes for UK pension transfers given that KiwiSaver is set up for expressly different purposes and that the KiwiSaver regime is methodologically different from the UK pensions regime (you can have multiple employment and personal pensions in the UK at any one time)?
Here we analyse some of the advantages and disadvantages of using a KiwiSaver scheme to receive your UK pension transfer and compare these to using a specifically designed New Zealand superannuation scheme that is registered as a qualifying recognised overseas pension schemes (QROPS). It seems fair to say that on the balance we would not recommend KiwiSaver schemes for QROPS as they have a considerably higher level of limitations
Flexible access to funds – but will the payments be unauthorised?
KiwiSaver schemes offer more payment flexibility than under UK regulations these are:
- First homebuyers withdrawal – which allows under circumstances some or all of the KiwiSaver funds to be withdrawn at the request of the member (although the scheme rules must allow it)
- Significant financial hardship – this is either through ill health or significant financial pressure. Now while the UK have regulations in respect of payments for ill health this are considerably more stringent than the KiwiSaver rules
- Moving overseas permanently - once the you have been overseas for a year you can withdraw your funds from the KiwiSaver scheme
- Full withdrawal of the funds at age 65 years old
While these flexible benefit structures may look appealing in the first instance, they could lead to unauthorised payment charges from the HMRC in the United Kingdom. The unauthorised payment charges are levied when a payment is made to a member who has been a tax resident in the UK in any of the five prior complete and consecutive UK tax years that would not be in accordance with UK pension payment regulations. The majority of the payments listed above are not allowable under UK pension legislation and so are unauthorised payments. Whether the member will receive a tax bill from the HMRC is dependent on how long they have been outside of the UK.
The UK doesn’t care whether the member has contributed non-transfer funds or not
Compounding the situation outlined above is the fact that the HMRC consider that any payment out of a QROPS is deemed to be UK transferred funds first. So despite the fact that a member may have contributed into their KiwiSaver scheme and only want to withdraw their own contributions (not the UK transferred funds) the HMRC will require the payment to be reported.
Therefore, transferring a UK pension scheme into KiwiSaver could significantly disadvantage the member as it would provide an unintended disincentive to withdraw their funds, even if they are eligible. This is particularly highlighted in the case where the individual leaves New Zealand after say three years but would still have to wait out their five UK tax year window before they were able to withdraw any funds.
Switching between KiwiSaver schemes can be fraught with danger – as not all KiwiSaver schemes are QROPS
As previously discussed, Inland Revenue designed the KiwiSaver switching process to be easy. Effectively, it allows the member to take control of their scheme and manage it between providers and workplaces (where workplaces have different schemes). So if the member exited one workplace scheme and joined another the transition would be seamless.
What happens if the next workplace scheme is not registered as a QROPS and the member has transferred their pension into their first workplace scheme? Then theoretically the first scheme cannot transfer the funds, as they would not be allowed to under their obligations as a QROPS. However, this would seem to significantly disadvantage the member as they could not receive the benefits of belonging to their new work place scheme (they would be forced to opt-out) all because they transferred their UK pension.
Worse still would be the position that the first KiwiSaver provider makes the transfer to the second KiwiSaver provider this would be an unauthorised payment under UK legislation. And if the member has not been outside of the UK for 5 complete and consecutive UK tax years, then the HMRC could levy the 55% unauthorised payment charge on the member. With transfers being conducted as a rate of two or three in a year at present – this situation could get dangerous for members in the future.
With four out of six of the default providers not being QROPS there is a real possibility of multiple unauthorised payment charges.
Upon leaving your employer with an employer Kiwisaver scheme – the Inland Revenue will provisionally allocate you to a default KiwiSaver scheme and give you 3 months to choose your own scheme. If you don't choose another scheme within 3 months, Inland Revenue will confirm your enrolment in the default scheme. Of the 6 default providers only two of them are registered as QROPS. Therefore, unwittingly the member could find themselves in a position where inaction leads to them being slapped with a 55% unauthorised payment charge.
KiwiSaver schemes are not designed to receive migrants overseas pension funds
There are numerous reasons why KiwiSaver schemes are not the ideal end investment option for UK pension transfers. Here we highlight some of the main disadvantages:
· Kiwi saver schemes do not offer pound sterling investment options. With the exchange rate at historical lows members are more inclined to want sterling denominated investments and investment options as well as New Zealand dollar options (as well as the ability to switch between these easily)
· Kiwisaver schemes are not zero-rate PIE’s so there are no tax advantages during transitional residency of joining KiwiSaver
· With the exception of Australia (pending that country's signing of the TransTasman Portability Agreement) KiwiSaver schemes do not allow for the transfer of the funds to another scheme overseas should the member emigrate from New Zealand and wish to emigrate their pension with them. The member can only cash in their funds (which as discussed would be an unauthorised payment and potentially subject to unauthorised member payment charges).
· KiwiSaver schemes are administered as KiwiSaver schemes and not as QROPS and are therefore less likely to keep up with rule changes in QROPS (or believe that they have to)
· KiwiSaver schemes do not allow for the payment of an entry or implementation fee to an adviser to be paid out of the transferred funds, hence the client would need to be charged a direct fee – many clients would find this difficult and would prefer fees to be paid out of their funds
· A well established QROPS will designate that 70% of the transferred value of your funds must be used to provide an ‘income for life’ with a minimum early retirement age of 55. Therefore, access to funds in a non-KiwiSaver QROPS is allowed a lot earlier than a KiwiSaver QROPS
So on balance, a transfer of a UK pensions into a KiwiSaver scheme has a significant number of risks attached unless both the advisor and member are fully aware of the implications and even then the transfer may jeopardise future options for the KiwiSaver member – a less than ideal situation.
*Simon Swallow is director of Charter Square NZ, a wholesale pension transfer business based in Wellington.
7 Comments
Why do you say that? With the UK's public finances going the way they are and simmering political resentment among non-public service pension holders about the relative luxury afforded by public service pensions there, one might hesitate to be confident that existing commitments will be honoured?
As with NZ, what they have done to address the issue is reduce the pension entitlements for new entrants and close the more generous public sector schemes to new members.
Public servants used be paid a lot less than they are now. The pensions were there to keep them from drifting off for more money at Big Company Limited.
In this case. we are talking about people that have already left the UK and have locked in their pension entitlement based on years and months of public service.
I think it would be a brave government that slashes the pension entitlements of retired teachers, nurses, firemen, soldiers and police.
While the article was not commenting on whether a transfer was in the interests of a member in the first instance - it is an interesting can of worms that you open. I am not sure that I entirely agree with your initial comment, as the government backed defined benefit pensions would be the ones worth transferring as gilt yields are at their lowest point meaning that pension valuations are extremely high. This makes the exercise a no-brainer from a value perspective as if they wait around the gilt rates will only go up lowering their pension values.
The most pertinent issues should be their ability to invest in sterling denominated funds so as to control exchange rates, and take advantage of the FIF rules if they are under transitional residency rules (by investing in a zero-rated PIE superannuation scheme).
p.s. the UK government have already changed pension entitlement calculations twice in the last five years.
p.s.s. last I heard they were thinking about introducing a pension tax similar to that in Ireland - so don't think that they are beyond a slash and grab.
Thanks for the response, Simon. I do agree with the article's main point that KiwiSaver is not a good place to transfer a UK pension.
Yet transferring a defined benefit government-backed scheme is far from a "no-brainer" and I do find that an alarming thing to write. Anyone that followed the UK pensions mis-selling fiasco of the 1980s/90s will know all about that. The value of the benefit that the person receives from the pension at retirement is the main thing here, not how big the notional transfer value is before they get there.
In one of those public sector schemes, a member may be entitled to a pension of (say) GBP 20,000 p.a. from age 55 for the rest of his life. When he dies, half of that goes to the spouse for the rest of *her* life. The pension paid increases in line with inflation and is paid regardless of how the underlying markets fare.
I think that's a pretty solid place to be compared to cashing it up and investing it in a QROPS in New Zealand. If the QROPS fails to deliver - you're pretty much on your own.
One potential benefit of transferring to a QROPS is that someone who is very ill may be able to secure a much higher and more useful death benefit because they have cashed up. No arguments from me there.
p.s. like NZ, the UK Government is always tinkering with pension entitlements. However, NZ Super and KiwiSaver is a blissful oasis of calm compared to UK pension regs.
p.p.s like NZ, pensions are taxed and the rates of taxation changes. C'est la vie. QROPS rules have changed retrospectively too and we know that HMRC are in no mood to lighten up on that.
Yes although I guess outside of the high transfer values (which there is only unidrectional gilt rate risk) you have the following issues that are well addressed through the transfer of a defined benefits scheme:
Exchange rates are fickle – meaning the members benefits are hardly defined
If a member ends up purchasing an annuity from a defined benefit scheme then they are then at the mercy of the currency fluctuations between the British pound and New Zealand dollar. This means in some years their income may be higher than others (you only have to look at the performance of the dollar to the pound over the last 20 years which ranges between $3.5 to a pound to $1.85 to a pound). This puts considerable stress on any retiree as they are unsure about how much income they will be receiving year on year – hardly defined benefits.
Most good QROPS in New Zealand will offer sterling denominated funds this means a member can transfer in their funds and invest in sterling denominated assets, then when the time is right for them, convert those investments into New Zealand dollar investments. This provides significantly more certainty and manageability for the member.
Crystallise tax obligations (if any)
A transfer to New Zealand will cause any tax obligations to crystallise at the point of transfer. In most instances if the member is a transitional resident in New Zealand there will not be a tax obligation on the transfer of the funds. Furthermore, if the member transfers their funds into a zero-rate PIE then they will be able to continue to their transitional resident status while invested in that particular superannuation scheme.
Furthermore, once the member’s funds are in New Zealand they will not have any New Zealand tax obligations on payments made out of the scheme and provided they have transferred into a QROPS non-KiwiSaver scheme should not have any future UK tax obligations. Therefore, there is a large tax saving available compared with the previously described situation.
If they leave the funds in the UK then under the Inland Revenues proposed tax regime the member’s lump sum will be taxable (at anywhere ranging from 0% to 33% in tax) and the remaining income will be taxable at the members marginal rate. This means that at least 75% (i.e. the non lump sum payment) will be taxable as income at a rate of up to 33% - this is the equivalent of paying 24.75% on the value of the pension fund.
Give the member increased investment management flexibility
A transfer into a well thought out New Zealand superannuation scheme should allow the member to invest in higher yielding investments denominated in both sterling and dollars. This flexibility combined with sound financial advice should allow better management and control of the members funds (and I know that this sounds similar to the UK arguments for transferring out of defined benefits into personal pensions). However, the member has to keep in touch with all UK legislation, understand how the company (if company scheme) is travelling and whether it will meet its future obligations, and hope that UK legislation does not change all while in New Zealand. Basically they are not in an environment where it is news and people are discussing it as part of everyday conversation - rather they are in New Zealand 12,000 miles away from all of that.
So I do think that there are some massive other reasons to transfer. Good discussion to date.
The money is still being transferred from a place where the benefits are defined over to a place where they are not defined in any way. With respect, I think you are introducing possible future scenarios that only benefit the case for a transfer. The scenarios could easily go the other way.
The tax side of things depend on HMRC not changing the rules again. If they see a loophole, they will close it and there will be little that one can do. They are not above doing it retrospectively either.
The final argument re being on the other side of the world implies that the investor's physical closeness to the investment means they are better placed to keep an eye on things. That's not really true anymore.
I don't think we are going to convert each other, so I will wish you all the best. Thanks for the opportunity to discuss.
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