Leaving a pension in the UK is an active decision which has consequences both now and in the future. Understanding these consequences is crucial as they inform your thinking and strategy with your UK pension. In this article we look at what it means to leave your pension in the UK when you are living in NZ, and some of the things that you should be regularly doing.
A frozen UK pension (not contributing and not in payment)
First up is looking at your pension when it has yet to come into payment and you are not contributing into it (often known as a frozen pension). Below is a list of the key things that you should be aware of:
- Your pension value will continue to grow or shrink in value depending on the markets and the investments made. This is regardless of whether your pension is a contributory pension or a final salary/defined benefit pension.
- In some circumstances you will have control and be able to change your investments, in others like final salary schemes you won’t. Regardless it is important that you are across your pension fund values at least once a year and understand what is driving value in them. We would recommend that you do an annual review and ask for a transfer value every year from your UK pension provider.
- For people with final salary pension schemes we recommend that they follow the XPS transfer value index to get an idea on what is happening with pension values for final salary schemes (see https://www.xpsgroup.com/what-we-do/technology-and-trackers/xps-transfer-watch/xps-transfer-value-tracker/)
- There will be no year-on-year tax consequences for you in either New Zealand or the UK (as the UK does not tax growth on UK pensions, and you are doing nothing that would create a taxable event in New Zealand)
- Each year that your pension remains in the UK can lead to a greater tax bill in New Zelaand if you do eventually transfer your pension
- If your pension grows over the current UK lifetime allowance limits this will give rise to a future tax obligation in the UK, this is another reason to ask for a yearly valuation of the pension
- If you have a defined benefit/final salary scheme pension in the UK and the sponsoring company goes into default, you will be protected by the Pension Protection Fund (PPF) to at least 90% of the value of your pension
Taking a UK pension (pensions in payment)
If you decide taking UK pensions is in your best interest, or you are already taking UK pensions before you arrive in New Zealand, then you should know (by taking a UK pension we mean one that is paying out to you):
- If your pension is paid out as a pension from the UK you will declare it as income in your tax return in New Zealand and pay tax in New Zealand regardless of whether you bring the money into NZ or not. This is because New Zealand taxes worldwide income on a non-remittance basis (they don’t care if you bring it into the country or not)
- Under the double tax treaty between NZ and UK, New Zealand has taxing rights. Any tax you pay in the UK will not be offset against New Zealand taxes
- You will need to complete a New Zealand tax return each year (an IR3) to account for the pension that you receive from the UK. This will mean that you need to record the New Zealand dollar amount that you receive
- You may have a New Zealand provisional tax obligation depending on the amount of the pension
- New Zealand and the UK have an information sharing order where once a year the HMRC and Inland Revenue pass data about residents and former residents between each other to ensure that there is tax compliance on worldwide income
- Any tax-free lump sum (from a UK perspective) will be assessable as income in New Zealand for tax (that means not tax free)
- Other beneficiaries of your pension (in the event of your passing) will have tax obligations depending on their country of residence and what type of pension you are leaving them
Housekeeping for your UK pension
Other factors for consideration and some housekeeping on your UK pension:
- Inheritance planning – you need to understand what and how your UK pension will pay to your beneficiaries in the event of your death
- You need to understand the benefits/liens that your pension may have, such as:
- Guaranteed Annuity Rates (GARs) which can promise high annual annuities and are very valuable
- Pension scheme funding position – is your pension in deficit and what is the company’s plan to restore the deficit
- Contracted out State Related pensions and what level of annual increase these will rise at
- Many clients have a parents or relatives address listed as their address with their UK pension fund providers. We would recommend that you update your address to your current New Zealand address as well as double check that they have all your details correct (it is amazing how often these are not correct), including your:
- Name (in the instance you have got married and had a name change)
- Date of birth
- National insurance number
- Next of kin
- Ensure that they have up to date signature and identity information for you (your passport etc)
- We also recommend that you advise next of kin about your pension as well, so that in the instance anything happen to you they will know who to contact.
If you want to fully understand your pension in the UK and the consequences of leaving it there, please feel free to contact us for a review of your circumstances and pensions. We will be more than happy to help.