Over the last 16 years of transferring pensions we see some consistent pension transfer objections around moving a pension to New Zealand. More often than not once we have explained the situation to our client they have realised that these pension transfer objections are less relevant when considering a pension transfer to New Zealand. Here we explore some of the common pension transfer objections and their relevance in a pension transfer decision.
Pension transfer objections – 1: The exchange rate is not in my favour
Depending on when you started tracking the New Zealand dollar to British pound exchange rate you might have a strong opinion on when you will transfer your pension. We come across many instances of people nostalgically stating “I remember when the pound bought three dollars”. While that may have been the case 10 years ago it is not relevant in todays environment and waiting can have a lot of negative impacts.
If you want complete control of exchange rates this can best be achieved by having the funds in New Zealand. Why? Because in New Zealand superannuation schemes you can invest in sterling denominated funds once you have transferred your pension. This ability to hold the funds in sterling also means that you can convert your pension from sterling to New Zealand dollars at a rate on any given day – as the transaction can be done on a day in New Zealand. If you leave your funds in the UK and wait for the rate to get to a value you like by the time you complete the pension transfer process (which generally takes three months) the rate can be completely different.
Furthermore, the current exchange rate may actually be working in many peoples favour when it comes to calculating the tax on a pension transfer to New Zealand (particularly if you can remember when it was three dollars to the pound). For an understanding of why this might be the case we recommend that you read the following…read more
Pension transfer objections – 2: I should never transfer a defined benefit/final salary scheme
This is typically a mantra that is banged out in the UK and when in a tax neutral position it may be true. But when your pension lives in the UK and you live in New Zealand the decision is not tax neutral. What that means is a and therefore you need to review your UK pension to see the differences between leaving it in the UK and bringing it to New Zealand.
If you are a member of a UK defined benefit scheme and have moved to New Zealand you need to consider a other factors when thinking about whether to leave or transfer your pension, including:
- Exchange rates
- Tax consequences in both jurisdictions
- Current valuation levels of the members UK defined benefit scheme
Often the last point is crucial as final salary scheme transfer values have been very high recently when compared to the benefits that are on offer. It is worth remembering that what is called the Cash Equivalent Transfer Value (CETV) of a final salary scheme (which is essentially the amount that a scheme will send to another scheme) does not, in the short term, move in direct relationship with the amount of yearly pension they will pay you.
The CETV is determined by calculations (and not the amount of funds in a pot) of which a big variable is interest rates in the UK, the CETV can move wildly. But the general rule of thumb is the lower the interest rates the higher the value of the pension pot. How much is this effect – well a clients CETV moved by over 10% in a three month period when long term interest rates dropped 0.2% in the UK. The important point to understand is that interest rates are at historic lows in the UK driving very high CETV’s. Find out more here.
Pension transfer objections – 3: It is too much hassle to transfer a pension
When you have experts like us doing all the heavy lifting with our teams here in New Zealand and the UK, usually you have to do very little. And it is significantly less than trying to sort out your UK pension at retirement when you are in New Zealand and the pension in the UK and file tax returns in New Zealand every single year.