(how to not end up with a lemon)
Pension transfer traps exist as the area of pension transfers is complicated involving multi-jurisdictional legislation and rules as well as rules within all individual QROPS.
1. Fees – hidden in the least likely of places
Probably the most harmful of all the pension transfer traps. Not all QROPS schemes have the same fee structure and it is often very hard to compare them. However, our experience has shown that the key fees that people need to understand are:
- Exit fees from UK pensions – often UK schemes might be under funded or are with profits schemes, in these instances there might be a penalty for exiting the UK scheme. It is important to understand these penalties and what will happen with them over time.
- Entry and exit fees from New Zealand schemes – these can range between 0% and 5% depending on the scheme. Obviously the schemes with 0% offer more flexibility.
- Foreign currency fees – these are often hidden from sight and can be significant. The lowest that we have seen is 0.14% above wholesale rates, although there are some providers in New Zealand that are charging a 2% margin on converting sterling to New Zealand dollars on top of the margins the banks are taking.
- Annual management fees – these can vary depending on the type of scheme and the requirements that the scheme has. Therefore, it is often the case that the more complex the scheme and/or underlying investments the higher the annual fees. It is important to be aware of exactly what you are paying for. Some schemes will also offer ongoing fee discounts for clients with larger balances so it pays to be aware of your purchasing power when making a decision.
We clarify all these points in our advice before you transfer your UK pension to a QROPS in New Zealand.
2. Pension lock-down instead of freedom
There are a significant number of rules and regulations which create all kinds of pension transfer traps around how and when you can access your funds from a QROPS scheme. The pension age test is the most significant one, which states that you cannot access any of your funds prior to the age of 55. However, there are a number of other traps to consider:
- Will the scheme allow you to transfer out to another scheme in the future
- Does the scheme lock your investment in, rather than giving you freedom to get your money out
- That the scheme rules allow for flexible access should the HMRC regulations move in that direction
We ensure you transfer your UK pension to a QROPS scheme that meets your needs.
3. Stuck forever in the wrong scheme
For a long time we were advocating that KiwiSavers were not the right type of scheme to be transferring UK pensions to. We were not surprised, therefore, when they were removed as QROPS in 2015. The reason that we were discouraging of KiwiSaver schemes were the make up of the scheme and the clash of rules between QROPS and KiwiSaver simply made it risky to transfer into these schemes. It is crucial that you select a QROPS that provides you the flexibility to do what you want not only now but in the future. This means understanding how the rules of the scheme (as shown in the Trust Deed) support your circumstances.
We constantly review the Trust Deeds of schemes so you benefit from our deep understanding of the issues.
4. The surprise tax bill
Many people are surprised to hear that they could have a tax liability on transfer in New Zealand if they have been living in New Zealand longer than four years. Unfortunately many other advisers seem to gloss over the tax issue for clients, however, we believe that it is central to any decision on whether to transfer your pension or not. Because if you create a tax liability from transferring that you cannot afford to pay (you cannot use the transferred funds to pay the tax unless you are over 55) then this will create undue stress and not be the right outcome.
We know the tax legislation well and as part of our service to clients investigate the likely tax implications of a transfer to New Zealand.
5. Knowing the rules and regulations
Pension rules in both New Zealand, the UK and Australia (for Australian residents) play a large role in pension transfers. As they are constantly changing this creates the need to often act quickly, as has been the case in the past with the closure of transfers from unfunded public sector pensions (like the NHS, Teachers and Armed Forces pensions).
We ensure that our clients are always in the know through regular communications before, during and after pension transfers to make sure that they are never caught short.