What is a QROPS Pension: Commonly Asked Questions
+ What is a QROPS?
A QROPS is a Qualifying Recognised Overseas Pension Scheme. In New Zealand this is an HRMC approved Superannuation fund with strict rules around withdrawals that comply with the UK rules.
+ What does QROPS stand for?
Qualifying Recognised Overseas Pension Scheme
+ What is a QROPS Transfer?
If you decide to transfer your pension to New Zealand, after you have moved here, you can do so by transferring it into a QROPS. The New Zealand QROPS must adhere to the pension transfer rules set by the HMRC. The only way you can transfer your pension to New Zealand is through a QROPS.
If you cash your pension up in the UK before you come to New Zealand while you are still a British tax resident, you will not be transferring a pension. You will just be bringing money to New Zealand. However, 75% of your pension will be taxed by your UK pension provider before they release your funds. You can only cash up your pension after you have turned 55.
If you cash up your pension in the UK after you have moved to New Zealand and then become a New Zealand tax resident, your pension will be taxable in New Zealand based on the rules for the taxation of pensions. As well as this, your UK provider will have already deducted tax from 75% of it. You can claim back the tax paid by your UK pension provider because of the Double Taxation Agreement between New Zealand and the UK. This process, however, is time consuming and can be expensive if you use an accountant.
+ Can I transfer my QROPS back to the UK?
Once you have converted you pension into a QROPS, you have accepted a transfer value and moved to another scheme in another country. The deal has been done. If you decide to move back to the UK, your previous pension provider will regard you as a new client. You can set up a new scheme, but you cannot re-join the one you left.
If you leave New Zealand permanently, you can cash up your QROPS and take your funds with you.
Caution: If you move to live in another country within five years of transferring your pension to New Zealand, the NZ QROPS is obliged to notify the HMRC that you have emigrated and a charge of 25% of your transferred pension funds will be applied. This is the Overseas Transfer Charge (OTC). The OTC will be applied even if you leave your funds in New Zealand. As soon as your QROPS provider learns that you have moved to live in another country, they must advise the HMRC and deduct the OTC from your funds.
+ What is the best performing QROPS in NZ?
Nothing stays in number one position forever. A best performing fund will inevitably fall from the top position.
There are two ways to get better than typical returns.
Invest into funds that don’t have high management fees. Your investment returns will be eroded by high fees.
- Actively managed funds cannot consistently outperform the markets.
- Passively managed funds will slide downwards in a market downturn and rise in a market upturn – this is unsatisfactory.
The solution is to invest somewhere at the midpoint between active and passive funds management. You can choose to be invested in Smart Beta funds, which is a way of investing that sits between active and passive funds management. Most QROPS providers cannot provide this option. At Lyfords, we can explain which QROPS will be best for you.
The best performing funds would have most of your pension funds invested in equities (shares). Usually, share markets perform better than term deposits and fixed interest, but investment markets have regular ups and downs. In the long-term, you can expect to get the best returns if you are invested 98% in world share markets. Would the risk of losing 50% of your capital in less than a month, or a week, be a concern to you? Even if you knew the theory that the market would bounce back, could you sleep?
Consider the Global Financial Crisis of 2008/2009, when US equities dropped 54% over an 18 month period. For those who remained invested, their funds recovered and over the next few years there was strong growth.
Those investors continued to get ‘the best’ returns compared to investments that had more of their money invested safely. For those who panicked and cashed out of their shares, they consolidated their losses and enabled another investor to make great gains.
An investment market is a zero sum game. When one investor sells for a low price, accepting their losses; another will buy, celebrating a great gain. It’s just like investing in real estate: sometimes someone will sell a property in a hurry at the wrong time. Another will seize the opportunity to buy at a sale price.
+ Is QROPS a good idea?
It usually, but not always, makes sense to transfer your pension to New Zealand after you have moved here. Sometimes, a pension provider promises to pay an inflation-adjusted income for life that is far higher than the income you could get in New Zealand.
It would be foolish to cash a valuable scheme up just to access instant money (assuming you are over age 55 and can). Usually, the figures show that transferring your pension to NZ is the better option.
Before you make a decision, Lyfords will look at your options provided by your UK pension provider and discuss them with you.
+ Is there a Kiwisaver QROPS?
There’s no such thing. All Kiwisaver plans were removed from QROPS status by the HMRC after it was noticed that members could access their funds (for home deposits) earlier than age 55.
Find out whether transferring your pension to a QROPS is right for you by talking with an expert at Lyfords
QROPS Lump Sum
When you transfer your pension to New Zealand, it can only be transferred into a QROPS as a lump sum. This transfer value is calculated by your UK pension provider.
It is then transferred to your New Zealand QROPS where the money is invested based on your retirement requirements and your investment risk profile.
This may include a decision to withdraw some, or all, of your funds after you turn 55 and have been living in New Zealand for more than three years.
Lyfords will help you to decide how much retirement income you want every year. Usually, people want more in the first ten years of their retirement and less as they get older.
The lump sum you transfer into a QROPS in New Zealand will ultimately provide you with retirement income that is paid into your bank account every month.
This income is a draw down on your investment capital and is not tax deductible. Growth on your actual investment pot is taxable.
The only way you can transfer your UK pension to New Zealand is via a QROPS. The benefits of doing so are:
You will no longer need to worry about varying exchange rates between New Zealand and the UK.
You will have more control over your retirement income and a good relationship with your financial adviser, rather than being a non-entity in a highly automated and vast UK pension company.
Many British ex-pats get frustrated with poor communication from their UK providers.
You will have more choice about where and how to invest your money.
You might pay less tax. You’ll need to talk with a qualified tax adviser about your tax liabilities. Lyfords can guide you through this and refer you to an accountant who has experience in the taxation of UK pensions.
You are likely (but not certain) to have a higher after tax income in your retirement. You must discuss this with your financial adviser.
You’ll have more options with your money when it is in a QROPS. If you’re not happy with one, you can move it to another.
Lyfords does not charge a fee to assist you with this (but it’s rare that people are not happy). If you’re not happy with Lyfords, you can move to another advisory firm. We value your business and aim to keep you as a long term client.
When you die, the money left in your retirement pot will be paid into your estate according to the instructions in your will. Many UK pensions either stop or reduce by 50% when a benefit is paid to a surviving spouse.
More people are leaving pension schemes than joining them. An estimated 3,700 schemes have deficits, and 1,800 have surpluses.
There are 11 million Brits in defined benefit schemes. 3 million are expected to encounter problems, with only a 50% chance of receiving their promised pension (The Guardian, January 2018).
QROPS Tax Charges
It is essential that you have a good understanding of your tax obligations. The basic points are:
If you transfer your pension within the first four years that you become a New Zealand tax resident, you will not have a tax liability.
If you leave New Zealand within five years of transferring your pension funds, an Overseas Tax Charge (OTC) of 25% will be applied to your funds.
The IRD Tax Increments Table (found here) shows that your tax liability will increase every year (after the first four ‘free’ years). The increases start at 4.76% in the first year and increase to 100% in year 26. If you are planning to transfer your pension, it’s best to do so within the first four years.
Tax in the UK is based on contributions into a pension scheme are Exempt, growth on the scheme is Exempt, the pension is Taxable. This is referred to as EET.
In New Zealand, it’s the reverse. Contributions are made from Taxed income, investment growth is Taxable, income in retirement is Exempt. This is referred to as TTE.
You are responsible for paying your tax in New Zealand. Your personal tax liability will not be managed by your New Zealand QROPS.
Tax is not deducted from your transferred funds to pay for any tax owing on the initial transfer. The QROPS provider will pay tax on the investment growth of the fund.
Caution: If you don’t pay your tax owing when you transfer your pension, IRD will charge you interest on your tax debt when they catch up with you.
Their computer systems are very good now and it is likely that they will eventually demand any tax and interest on unpaid tax that you owe.
Tax loophole: How to transfer your pension funds and pay no tax
Theoretically you can. Will you? Has this obvious method been tested? We don’t know. Will you take the risk? We can explain it to you, but we do not recommend it! This loophole is too serious to explain in this summary.
We would be happy to explain it to you in a free consultation.
Learn more about your QROPS benefits and tax implications by talking with a specialist at Lyfords