The 7 traps to avoid when transferring your UK pension
Pension Trap 1: The unexpected tax bill
When you are outside the four year tax exemption you will be required to pay tax in New Zealand on the transfer value based on how many years since you became a New Zealand resident.
If you are over the age of 55, schemes we recommend allow you to withdraw up to 30% without incurring early withdrawal fees to pay the tax due. When you are under this age you will need to fund the tax liability from your other investments or even taking out a small mortgage.
The tax liability will result in you falling under provisional tax rules. If your liability is less than $60,000 you qualify under ‘safe harbour’ criteria and will not have to pay use of money interest. If your tax liability is greater than this then a voluntary tax payment before the due date is recommended.
Pension Trap 2: Changing you mind
Once you start drawing down on your pension fund in the UK it cannot be transferred to New Zealand. To transfer your pension you will have to show you are a permanent resident in New Zealand and must not have set-up regular drawdowns.
Pension Trap 3: Delaying your decision to transfer
Delaying your decision because of the exchange rate. If you have concerns about the exchange rate then discuss this with us. We can give you a consensus of the 18 month outlook for the UK/NZ exchange rate. There are many factors impacting the exchange rate.
If you are really concerned we can transfer your funds and retain them in Sterling cash and invest them either in a cash, socially responsible balanced or 100% equities portfolio all held and invested in Sterling.
There are downsides to doing this.
The longer you wait to transfer the higher your potential tax liability.
Pension Trap 4: Your funds are locked-in
Avoid locked-in schemes. Some NZ QROPS schemes (not the ones recommended by Lyfords) lock members into the scheme beyond the conditions specified by the HMRC. They may also have high exit fees.
Pension Trap 5: Hidden fees
Some UK schemes that are under funded are charging exit fees. It is important to take this into account when analysing your options.
Does the New Zealand QROPS scheme charge entry and exit fees. It has become common for most schemes to charge an early withdrawal fees if you withdraw any funds within the first 1-3 years. The first 30% of your funds will not incur an early withdrawal fee.
Foreign exchange fees for conversion of pounds into NZ dollars may often be hidden in the exchange rate declared. Some providers in New Zealand are charging as high as 2% margin above wholesale rates for converting pounds into New Zealand dollars.
Pension Transfer Trap 6: Being too conservative
If you are retired we recommend your funds are invested into a ‘balanced’ risk-return profile scheme. This is 60% to growth assets (share, property) and 40% to defensive funds (cash, bonds).
If you are younger than 55 a growth risk-return profile (70% growth assets to 30% defensive assets) may be more suitable. We will ask you to do a risk-return profiling questionnaire and discuss your situation.
By being too conservative your savings may not keep pace with inflation.
Pension Trap 7: Not reviewing your investments
Not reviewing your investments. We believe its important to keep track of your investments and review asset allocations to ensure your risk/return profile stays within its limits.
This is all part of our service and we do not charge for review appointments.