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Pension changes for Kiwis returning home

by Sable International | Oct 01, 2013
  • Some major changes are afoot in New Zealand’s tax laws, and it’s looking likely that New Zealanders returning from a stint in the United Kingdom should transfer their pension home before some potentially large tax charges are enforced.
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    The proposed changes to New Zealand’s tax and legislation environment will be rolled out from the 1st April 2014. Indeed, they’ll come as no surprise to some, given that “the tax issue” has long been a thorn in the side of workers entering New Zealand without New Migrant transitional tax relief (a system that applies to both new migrants who opt to receive it, and to returning New Zealanders who have been out of the country for more than 10-years). 

    A welcome solution

    According to Mike Cole, Authorised Financial Adviser at BritsNZ Ltd (who works closely with Sable), the changes have been necessitated by the long history of unclear communications issued by the New Zealand government and Inland Revenue Department (IRD). Many migrants were, for example, aware of their tax liabilities, but had no idea how to calculate, let alone pay, the appropriate tax. This resulted in a non-compliance rate of 80%. 

    To their credit, both the government and the IRD have now put their hands up and acknowledged that the situation needs urgent fixing. 

    The New Zealand parliament is currently putting a bill through the parliamentary process to simplify the system and enforce compliance. However, it will only be implemented after an extensive campaign is unrolled, aimed at educating the public about their tax obligations.

    If you’re a New Zealand citizen returning home, the only way to cap this tax liability is to transfer the benefits to New Zealand as soon as possible. Interestingly, after meeting with a senior technical officer at the IRD, Mike Cole says that the government has decided that returning New Zealanders who have been outside the country for less than 10-years when they return will, from 1st April 2014, be entitled to the four-year allowance window, but only on their UK pension benefits.

    What this means for you

    • If you’re currently in the UK and return to NZ after 1st April 2014, you’ll have a four-year window to transfer your benefits to NZ.
    • If you’ve been back in NZ for less than four-years (assuming you count back from 1st April 2014), you’ll need to get those UK benefits transferred before the end of the four-year period.
    • If you’re currently in NZ and have been back from the UK for more than four years, you’ll have three options:
      1. Transfer now (MUST be before 1st April 2014) and use the standard foreign investment fund rules – these disappear after 1st April 2014.
      2. Transfer now (before 1st April 2014) and pay a 15% flat rate of the transfer value in tax.
      3. Wait until after 1st April 2014 and use the available table rate. For example, as proposed in the current bill, if you have been back from the UK for eight years, the tax rate will be 36.06% of the transferred amount. 
    Please note that the above three options will require input from a tax specialist to identify which will provide the lowest rate of tax. The government is allowing you to choose whichever of these options creates the lowest amount of tax. 

    Acting early

    Under these proposed changes, you’ll only have to declare your UK pension benefits when you transfer them, or when you draw benefits from them. In other words, it is action-driven.  

    You can always opt to leave your benefits in the UK, and then choose to draw them out as a lump sum amount and/or as a monthly pension. Note: In this case the IRD will not only tax your UK tax-free lump sum at whatever rate is appropriate on the table, but will also tax your income at 100% - i.e. if you are a 33% tax payer, then your UK pension income will be taxed at 33%. 

    If you’re currently outside your four-year transitional relief period, have not taken transitional relief, or have returned from a stint in the UK for under 10-years, you’ll still need to report any assets held overseas, including your UK pension benefits. 

    Though these changes may seem drastic, they’re geared towards simplifying what has been, up until now, a fundamentally shoddy process. And, of course, there are the necessary tax benefits for those who abide by these new changes, so there is some hope that the process itself will incentivise returning New Zealanders to comply with the new changes. 

    None of these changes should dictate how long you should remain outside of New Zealand. Rather, they should dictate how quickly you anticipate moving UK pension benefits back to New Zealand. Being fore-armed is key to making tax decisions that work in your favour.

    Acting now makes the most sense, even if you’ve been back for less than four years in New Zealand. As stated above, the ONLY way to cap your liability is to transfer these benefits to New Zealand.

    For more information on these developments and how they may affect you, speak to your a wealth adviser. You can email or phone +44 20 7759 7519.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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