In the UK, your pension savings and investment earnings are tax exempt, but your retirement income is assessable for taxation. This is known as Exempt, Exempt Taxed (EET).
In New Zealand, the money you contribute into your superannuation fund has already been taxed, from your earned income. The superannuation fund manager pays tax on the growth of your superannuation funds. Capital withdrawals are tax free.
Withdrawals from your personal pension fund in New Zealand are not treated as taxable income. This is referred to as Taxed, Taxed Exempt (TTE). When you are paid an Income for Life, it is not taxable.
DO NOT PAY MORE TAX THAN YOU HAVE TO.
On 1 April 2014, the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 came into force. The purpose of the Act was to make it easier to understand how much tax you are required to pay on your UK pension funds when you bring them to New Zealand.
The Act is retrospective, so if you didn’t pay tax on a pension when you brought it to New Zealand, you have to now. From April 2015, the IRD became less tolerant to those who haven’t ‘come clean’. Tax penalties may be applied in this scenario. The IRD estimated that 70% of people who have transferred their foreign pensions to New Zealand, or who have made a withdrawal on their foreign pensions, are non-compliant because the old tax rules were complex.
Under the new rules you may transfer your pension to NZ into an approved QROPS Scheme. Your tax liability will be based on the number of years you have been in New Zealand (excluding your transitional residency period). The first 4 years are tax exempt based on the date you are deemed to be a tax resident.
After the transitional tax residency period your tax liability will start at 4.76% of the amount you are transferring. This will increase each year until you have been in New Zealand for 30 years or more. At this stage 100% of the amount transferred will be taxable at your marginal tax rate.
if you had been in NZ for 5 years and transferred $100,000 your taxable additional income will be $4,760. The first 4 years are excluded (transitional tax residency exemption). If your tax rate is 33%, then your tax liability will be $1,570.80. If, however, you defer transferring your pension for 30 years all of your funds will be taxed. The full $100,000 will be treated as taxable income, and your tax liability, assuming a 33% tax rate, will be $33,000. It may still make good sense to transfer.
THE SOONER YOU CHOOSE TO TRANSFER YOUR PENSION FUNDS, THE LESS TAX YOU WILL HAVE TO PAY.
For Contributory Pension schemes (not a Final Salary pension) there are two methods which can be used to determine your tax liability; the “Formula Method” and the “Schedule Method”. This is discussed further in the Blog Fantastic Tax Savings are Possible and the IRD paper ‘Tax Rules for Foreign Superannuation Lump Sum‘.
To identify your tax liabilities refer to our blog Taxation Increments Table. We do recommend that you seek advice from a specialist tax adviser. We can direct you to a competent accountant.
Alternatively, ask your accountant if they have specialist knowledge in this area. Its not uncommon for accountants to seek clarification about the complex tax rules from Lyfords.