TAXATION CASE STUDY

Know Your Tax Obligations

The Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014

Pension funds in the UK are not taxed by the UK Government, and Brits can save up to £40,000 p.a. for their retirement from non-taxable income.

If you are a British ex-pat, or a returning Kiwi, now that you are living in NZ your UK pension funds are called foreign investments and are taxable after a four year transitional tax period. You must pay tax in NZ on your world wide income (including your UK pensions).

The Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 was introduced to make the tax rules regarding UK pensions much simpler.

YOUR OPTIONS:

Do nothing and take a pension at retirement. Your pension funds will be fully taxable – 100%
Transfer your pension and pay the required tax based on the IRD table below. Any drawings from your investments will be treated as capital and will be deemed not to be taxable income. Growth on your funds will be taxed.

Note: It is important to talk with a pension transfer specialist, financial planner, and QROPS specialist in New Zealand (a Lyfords adviser) to understand your options. The pros and cons of transferring are not just about the tax issues. With 17 years’ experience in seamless UK pension transfers, we are well versed with the UK pension legislation and UK entitlements and HMRC QROPS changes.

Are you a UK expat searching for pension advice in New Zealand?

Book Free Consultation *Please note: We cannot transfer pensions that have transfer values that are less than $20,000.

Name

Email

Phone Number

Date of Birth

Approx. Value of Pension Fund/s (in UK Pounds)

Additional Comments

HOW MUCH TAX ARE YOU LIKELY TO HAVE TO PAY ON YOUR TRANSFERRED PENSION FUNDS?

For Contributory Pension Schemes (not a final salary pension) there are two methods for calculating your tax liability. These are the "Schedule Method" and the "Formula Method". You can choose which one gives you the lowest taxable income.

For Defined Benefit, or Final Salary Schemes, you can only use the Schedule Method to calculate the tax on the transfer value.

Schedule Method

Simply take the number of years you have been in New Zealand after the 4 year exemption period, refer to the "Taxation Increments Table” below. Multiple the transfer value by the percentage shown to determine your taxable income. Multiply this value by your tax rate to calculate the amount of tax you are liable for.

Formula Method

This is a slightly more complicated method, but considering the way the GBP:NZD exchange rate has fluctuated in the last 20 years (September 2019) between 3.68 and 1.68 this may result in a lower taxable income than the Schedule Method.

To calculate your tax liability under the Formula Method you will need to know:

The value of your funds at 4 years after becoming a NZ resident.
The value at the date you transferred.
The GBP:NZD exchange rate at 1) and 2).
The difference between 1) and 2 adjusted for the exchange rate is your taxable income. If this is lower than that calculated with the Schedule Method then you can use the Formula Method.

Example: Fred's pension

Fred has been living in New Zealand for 8 years and wants to transfer his pension. It has a value of $150,000 NZD.

During the first four years, he was a transitional tax resident and did not need to pay tax on his pension funds in the UK. He has a four year tax liability - 8 years as a tax resident minus the 4 years tax exemption.

Using the Schedule Method and the table below his tax obligation for four years is based on 18.6% of the total amount of the transferred pension. That is, $27,900 of his pension will be taxable at his marginal tax rate.

NOTE: If Fred waited until he retired and chose to receive a pension payable from the UK, he would have to pay tax on 100% of his pension funds.

Using the Formula Method, if Fred had become a tax resident on the 9th August 2011 his four year tax exemption period ends 1st September 2015.

The value of his UK pension funds on 1st September 2015 was 60,085 GBP. The GBP:NZD exchange rate on the 1st September 2015 was 2.41949. The value in NZD is therefore $145,375.
The value of his pension on the date transferred, 15th September 2019 is 76,586 GBP. The GBP:NZD exchange rate on the 15th September 2019 was 1.95858. The value in NZD is $150,000.
In NZ dollars he has made a gain of $4,625.

Under the Schedule Method Fred's taxable income from transferring his UK pension is $27,900. Under the Formula Method it is $4,625. As Fred's pension is from a contributory pension scheme he can choose the lower taxable income calculation, which in this case is that calculated under the Formula Method.

In this example the saving for Fred using the Formula Method versus the Schedule Method resulted in a tax saving of $6,982. Please refer to our disclaimer below.

Do you need a specialist tax adviser? Ask Lyfords - we can refer one to you.

Taxation Increments Table

Disclaimer: The information given here is by way of example. Lyfords are not tax accountants and do not accept liability. We recommend you discuss your situation with an accountant experienced in these calculations.