Fantastic Tax Savings are Possible with Pension Transfers 

If you transfer your UK pension within the first four years of becoming a New Zealand tax resident, you are exempt from paying tax on the transfer value.

If you transfer after four years of becoming a tax resident, your tax liability will be based on the IRD tax increments schedule.

Two options for calculating tax on your contributing pension scheme

When transferring a contributing pension scheme (not a final salary pension) there are two methods for calculating how much tax you will be liable for. These are the “Schedule Method” and the “Formula Method”. 

You can choose which method to use based on the one that gives you a lower tax liability.

Final salary, or defined benefit pension schemes, must use the Schedule Method to calculate the tax on the transfer value.

The Schedule Method is based on the total number of years you have been a tax resident, less the four year exemption. You then look at the Tax Increments table that gives you a percentage and multiply that percentage with your transfer value in NZD to work out your taxable income. You will pay tax on this amount at your marginal tax rate.

The Formula Method is slightly more complicated and uses the exchange rate at the date four years after you qualified as a tax resident and the exchange rate at the date of transferring your UK pension to New Zealand.

How choosing between the schedule method and the formula method can result in paying less tax

The Formula Method uses the GBP: NZD exchange rate and potentially large tax savings are possible. The GBP: NZD exchange rate has varied over the last 20 years; between 3.68 and 1.68. Even though your investments would have increased in value during this period, the value calculated in NZD could potentially be lower.

In our example on Taxation Case Study using Fred’s pension, which he transferred on the 15th September 2019 at the value of $150,000 NZD, we calculate he would be better off using the Formula Method. Using the Schedule Method, he would have a tax liability of $8,370, but with the Formula Method his tax liability would only be $1,388, a tax saving of $6,892.

In order to calculate this, you’ll need to know the value of your pension four years after becoming a tax resident, the value at the date of transfer, and the exchange rates.