- If you are not resident of NZ or been in NZ less than 4 years after acquiring the pension then you transfer is tax free
- If not you can use either the schedule method or formula method to calculate your tax – the results of both can differ wildly
- You can use the lowest method for determining your tax
If you are not a resident of New Zealand or have been in New Zealand less than four year since you acquired your UK pension fund then there is no tax on pension transfers you make. This no tax on pension transfers extends to returning New Zealanders who have acquired pensions while in the UK – you are no longer required to be outside of New Zealand for 10 years to receive this exemption. This was a very positive move by the IRD in New Zealand.
Lifting the hood a little more on the tax legislation on UK pension transfers to New Zealand there are two methods that you can use to calculate your tax on pension transfers. First, is called the “schedule method” (which is where the longer you have lived here the higher the tax on transfer) and second the “formula method”.
The “formula method” involves a more complicated set of equations, a whole lot more background information and a two page worked example by the IRD to explain it.
Boiling it down into it’s simplest terms, if the value of your foreign pension, in New Zealand dollar terms, was worth more four years after you arrived in New Zealand than when you transferred it to New Zealand you will have NO tax on pension transfers to New Zealand.
The fact that you have nothing to pay is obviously going to be better than declaring 15% of your transfer value as income.
The strong New Zealand dollar rides to the rescue
Because everything needs to be reported in New Zealand dollars under the “formula method” the strengthening of the New Zealand dollar in recent years means that peoples overseas fund values may have stayed static or decreased in New Zealand dollar terms.
The easiest way to demonstrate the exchange rate effect is looking at the exchange rate adjusted performance of the FTSE100. This shows that compared to the current value in most years the value was either higher or close to the current value as shown in this chart.
This could be great news for many people that have returned from the UK or immigrated to New Zealand who have been worrying about their tax bills after 1 April 2014.
If you don’t know past fund values you can’t use the “formula method” – and final salary schemes which make up 80% of all UK schemes by value cannot use the “formula method” for calculating tax liability.
As part of our service to client we review your likely tax position on transfer to ensure that you are optimising your tax outcome.