The new “Scheme Pays” rule

QROPS scheme provider can pay the transfer tax liability

If you are transferring a UK Pension and you are a New Zealander returning home after a decade or a new migrant then you are exempt the transfer tax for the first 48 months.

This applies to defined benefit and defined contribution schemes, but not regular annuity payments, which remain taxable

If you emigrated say on 15 August 2025 then your four year exemption period ends 31 August 2029.

Current Rules:

There are two separate rules that you can use to work out your tax liability.  You can select which one is more favourable.

     Schedule Method:

A percentage of the amount transfered is treated as taxable income after the 4-year exemption rule. This is detailed in the taxation increments table

The amount deemed taxable is taxed at your marginal tax rate.

     Formula Method:

This only applied to defined contribution schemes.  This method taxes the actual NZ-resident growth (opening value + contributions – withdrawals, adjusted for an interest factor). Often lower for short post-exemption periods or volatile currencies, but requires detailed records.

The tax that is payable must be declared on your IR3 return and cannot be deducted from the transfer value.

“Scheme Pays” for Pension Transfers

From the 1 April 2026 your QROPS provider can pay the transfer tax liability, this is the Transfer Scheme Withholding Tax (TSWT).  

Your NZ QROPS provider withholds 28% (TSWT) on the taxable portion (refer to the Taxation Increments Table) of the lump sum transferred and pays this directly to the IRD.

This is ideal if you are in a 33% to 39% marginal tax bracket or have a large transfer. If you are a 17.5% marginal tax payer then it is more effective to pay the tax liability yourself.

Optional – you can still choose what method you use

The Transfer Scheme Withholding Tax (TSWT) is optional, but you do need to notify your QROPS provider if you select this, otherwise they will leave the tax liability in your hands. Stick with the old methods if they yield lower tax (e.g., short post-exemption time + formula method). Or pay your tax liability personally at your marginal tax rate. The TSWT is ideal for 33% to 39% marginal tax holders, or if the taxable portion calculated from the Taxation Increments Table pushes you over into the 33% or 39% tax bracket.

Example: $100,000 UK Pension Transfer

Take an investor who’s marginal rate is 39% and has been a NZ resident for 10 years. Using the table shown above (The Taxation Increments Table) we can calculate how much of the transfer value is treated as income and is subject to tax at their marginal tax rate.