By Simon Swallow*
There has been lots of recent attention on the IRD’s plans to introduce a new tax regime on foreign pensions and the fact that the IRD are offering a special amnesty rate of only having to declare 15% of any foreign pension transfer as income.
This obviously looks really attractive when the amount of a transfer that you have to declare as income can rise to up to 100% post 1 April 2014.
Lifting the hood a little more on the legislation, the above analysis is based on what is called the “schedule method” (which is where the longer you have lived here the higher the tax on transfer) but there is a second method the “formula method”.
The “formula method” involves a more complicated set of equations, a whole lot more background information and a two page worked example by the IRD to explain it.
Boiling it down into it’s simplest terms, if the value of your foreign pension, in New Zealand dollar terms, was worth more four years after you arrived in New Zealand than when you transferred it to New Zealand you will have NO tax to pay on transferring your pension to New Zealand.
The fact that you have nothing to pay is obviously going to be better than declaring 15% of your transfer value as income.
The strong New Zealand dollar rides to the rescue
Because everything needs to be reported in New Zealand dollars under the “formula method” the strengthening of the New Zealand dollar in recent years means that peoples overseas fund values may have stayed static or decreased in New Zealand dollar terms.
The easiest way to demonstrate the exchange rate effect is looking at the exchange rate adjusted performance of the FTSE100.
This shows that compared to the current value in most years the value was either higher or close to the current value as shown in ths chart.
This could be great news for many people that have returned from the UK or immigrated to New Zealand who have been worrying about their tax bills after 1 April 2014.
If you don’t know past fund values you can’t use the “formula method” – this badly affects final salary schemes
The need to be able to determine the value of your overseas pensions at the time that your 4 year grace period expired – basically the value four years after entering New Zealand.
This is fine for defined contribution schemes where the values are online and you can go back to the administrator of the scheme or old statements.
However, if you have a final salary scheme you will probably not have a historical valuation (as they need to be specifically produced and are generally not done so retrospectively).
Because you don’t have this valuation you will have to use the “schedule method” and if you have been in New Zealand for seven years or more you will be more tax advantaged transferring prior to 1 April 2014 and taking advantage of the IRD amnesty.
More information on this can be found on www.qropsnz.com
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Simon Swallow is a director of Charter Square. You can contact him here.
9 Comments
I take it you mean a pension fund you are or were paying into?
So if you transfer a pension here to NZ you often pay huge penalties/transfer fees?
So surely the calc is leaving it there and pay the NZird when you bring the money over, or getting hammered for fees and paying NZ tax here?
Then of course you have to decide if you are staying here in NZ or not for retirement, if not then it would seem silly to transfer it here and then back again.
regards
Hi Happy123,
Under the proposed rules, upon arriving in New Zealand after having accrued your overseas pension, you have four years whereby you can transfer it to New Zealand tax free. After your four year exemption expires you must use either the schedule method or formula method to calculate your tax liability on the transfer of the funds to New Zealand.
Once your fund is in New Zealand you will pay tax on the growth of your funds in New Zealand, however, when a distribution is made by the scheme to you it will usually be tax free. If you funds remain in the UK and come into payment you must declare this as foreign income in your tax return and it is fully taxable.
In respect of fees, which is an issue for comment made on your comment, leaving your fund in the UK will require TT fees to be paid each time a payment is made from the UK. Transferring to New Zealand will usually come with a fee for getting advice on the pro's and con's of the transfer which should cover, your UK scheme and the benefits associated with it, your tax position and investment advice for New Zealand.
Hope that this helps.
Simon
Hi Steven,
The answer to your question will depend on the tax regime in the country that the pension is being paid out of and whether there is a double tax treaty between that country and New Zealand.
With the caveat of not being a tax expert, my understanding is that when you leave the UK you complete a P85 declaration of non-residency for tax purposes. This will then allow you to approach your UK pension provider and ask them not to tax your UK pension. Then you will declare the funds in New Zealand as income and will be taxed accordingly.
If the state that you are receiving the pension from taxes regardless of your residency and their is no double tax treaty between New Zealand and that state in respect of pensions then yes you could end up paying tax twice on the income.
Simon
Boiling it down into it’s simplest terms, if the value of your foreign pension, in New Zealand dollar terms, was worth more four years after you arrived in New Zealand than when you transferred it to New Zealand you will have NO tax to pay on transferring your pension to New Zealand.
Hi Simon
Do you know if this 4 year rule applies to when you entered NZ or 4 years from gaining Permanent Residence.
In my circumstance there is a 2.5 year gap between entry from the UK (Nov 2007) and gaining PR. This would obviously have an impact if I need to calculate the fund values on the different dates.
Regards
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