Is the schedule method over taxing UK pension transfers?

Defined benefit pensions in the UK set a defined benefit at the date of leaving the scheme.  This benefit is based on the final salary of the employee and the length of service that they performed with the scheme.  Over time the level of benefit grows with UK inflation and is generally linked to either RPI  or CPI. The benefits ususally grow both prior to retirement and in retirement. The reason for this is to guarantee the member an inflation adjusted income into the future.

 

A member of such a scheme may choose to transfer out of such a scheme and in transferring out loses their guaranteed income and accepts market risk in the value of their pension from that point onwards.

If the member transfers out of their UK pension into a New Zealand QROPS and they have been in New Zealand longer than four years then they have to use the schedule method to calculate the tax on their transfer.   The schedule method broadly follows the FIF rules and the fair dividend regime. Essentially, this says that the members returns are 5% a year.

The IRD state that no other basis is available for calculating tax on these transfers.

So looking back at CPI inflation in the UK since 1994 the first observation is that not one year has inflation been over 5% (this is even taking into account years that VAT in the UK increased by 2.5% gross on goods).

This automatically penalises an individual as they are paying tax on an assumed 5% growth when every historic data point simply shows this not to be the case.

What’s more when consideration is given to the exchange rate effects over that same period (using the average annual GBP:NZD cross rate) you can see that some with an income equivalent of $263.9 a year in 1994 would have seen that income in NZ dollar terms grow to $322.3 in 2018.  So over the 24 years that is an increase in income of only 22.1%.  Taking the same income in 1994 of $263.9 and multiplying it by 5% a year would imply an income of $874.4 or roughly $610 more that the stating figure.  This second figure is what the IRD are effectively saying is the taxable gain.   However, the reality for this individual is that they are only actually $60 a year better off.

 

Year Annual CPI Rate % Inflation adjusted income (GBP100 starting) Exchange rate NZD:GBP NZD income
1994 2.2  102.2  2.582  263.9
1995 2.7  105.0  2.404  252.3
1996 2.9  108.0  2.269  245.0
1997 2.2  110.4  2.480  273.7
1998 1.8  112.4  3.093  347.5
1999 1.7  114.3  3.055  349.2
2000 1.2  115.6  3.322  384.1
2001 1.6  117.5  3.422  402.1
2002 1.5  119.3  3.238  386.2
2003 1.4  120.9  2.810  339.9
2004 1.4  122.6  2.761  338.6
2005 2.1  125.2  2.582  323.3
2006 2.5  128.3  2.839  364.3
2007 2.4  131.4  2.721  357.5
2008 3.5  136.0  2.606  354.4
2009 2.0  138.7  2.484  344.5
2010 2.5  142.2  2.142  304.6
2011 3.8  147.6  2.027  299.2
2012 2.6  151.4  1.956  296.3
2013 2.3  154.9  1.908  295.5
2014 1.5  157.2  1.984  312.0
2015 0.4  157.9  2.191  345.9
2016 1.0  159.5  1.949  310.7
2017 2.6  163.6  1.813  296.7
2018 2.3  167.4  1.925  322.3

The discrepancy is better grapically illustrated below, which shows since 2001 there has been a large divergence between the implied financial gains under the IRD model and the actual benefit gains that have accrued to members.

With such a large difference we simply do not believe that the schedule method is appropriate for the determination of New Zealand tax on transfer for defined benefit schemes.

When looking at the data on a year by year basis there are no periods since 1994 when the inflation and currency adjusted performance would out perform the implied 5% a year return under the schedule method, if a client were to be transferring now.

If you have a defined benefit scheme in the UK you should talk to us about some of the methods that are available to mitigate a New Zealand tax bill on your UK pension.

 
 


 

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straightforward and painless

Until now I'd imagined my UK pension funds being locked away behind all manner of firewalls and bureaucratic hurdles to access on retirement. Before committing the one surviving official document of my English OE to the bin - a single page detailing my private pension details - I contacted you out of curiosity. The result feels a little like winning lotto.

Peter W

very stress free

Thank you Cambel for your help and guidance throughout this process in getting my pension transferred (very stress free for me). It is greatly appreciated and I would certainly recommend you and Charter Square to others who are interested in transferring their pension.

David R, New Zealand

You guys rock!

I just wanted to say a great big thank you to you and your team. You are all totally awesome. I received a cheque yesterday from the Prudential to apologise for the ‘recent inconvenience’ that I had experienced. Thank you for doing this for me. You guys rock!

Noelle B, New Zealand

professional, insightful

Charter Square were professional, insightful and a pleasure to work with. They rose to the challenge of consolidating my overseas pensions and bringing them home with minimum fuss for me and maximum effort on their part.

Jens H, New Zealand

thorough, professional and prompt

Very thorough, professional and prompt service from the team at Charter Square. Thanks for making the bewildering world of pension transfers super simple.

Jules T, New Zealand

Best party to deal with

Thank you kindly for keeping in touch with me. For now, I will not be moving my pension. I will however be keeping your details and referring back to you when I wish to pursue. You by far are the best party to deal with, no nonsense, professional and in my opinion genuine. I do sincerely thank you for your advice to date.

GE, New Zealand

Freedom

Securing the freedom to use savings that are actually ours to work with has been stressful in the extreme. While I never planned on giving up there were many times when the current (UK) holder made the whole process seem well beyond my determination and ability. It’s easy to look at the 36 month history of this claim with the benefit of hindsight, but the conclusion is that employing Charter Square in the first instance would have been wise had I been able to anticipate the red-tape that appears to have been deliberately created to stall access.

CP, Auckland