risks of a transfer
Transferring to the wrong type of scheme
Getting into the right type of scheme is critical. In the past people have been pushed into schemes that have simply not been right for them, and had large risks associated with them. Ask people who have:
- In past transferred into KiwiSaver schemes, and are now permanently stuck in these schemes (they have not even got the ability to move Kiwisaver schemes now)
- Been transferred to a Malta or Gilbraltar scheme and now find that they were charged considerably more in upfront fees than they were told by their “international advisers”
- Transferred into New Zealand schemes in the past who did not transition to the new FMCA regulations in December 2016 and who have not had the benefit flexible access written into the scheme
Getting an unexpected and possibly large tax bill
There are so many different tax rules to consider when transferring a pension and without knowledge of these they can really bite. Some of the taxes that need to be considered are:
- Tax on transfers in New Zealand levied by the IRD
- The Overseas Transfer Charge (OTC) levied by the HMRC
- Tax on payments out of the scheme
Digging into the first point the tax on transfers in New Zealand from the IRD, this arises if you transfer to New Zealand outside of a four year exemption window. There are many issues surrounding this tax, like:
- Being more than one way to calculate the tax (schedule versus formula methods) and you get to use whichever method yields you the lowest amount of tax
- The tax is calculated and returned through an IR3 and cannot be paid out of your transferred UK pension funds. So you must pay the tax out of separate funds
- Your personal tax position in a year may change (likewise your access to benefits) through a pension transfer
- There is no rebate on this tax if you pay it and then leave New Zealand
All tax issues need to be worked through and understood before considering a pension transfer. Unfortunately, there are many instances where we are contacted by people that have had unexpected tax bills from transferring their UK pensions. Once the transfer is done little can be done to “fix” a tax position.
Furthermore, many taxes have the ability to come back and bite later. Some have a time period that they can be applicable for in the future, such as the OTC which can be levied anytime up to five years after a pension transfer. That is why some certainty on future plans, and planning for future uncertainty is crucial with any pension transfer.
Giving up guaranteed benefits, forever
Many pensions in the UK offer guaranteed benefits and these can come in a variety of forms, like:
- Defined benefit schemes
- Guaranteed minimum pension (GMP) benefits
- Guaranteed Annuity Rates (GARs)
When you transfer out of these types of pensions you give up the rights to the guaranteed benefits and end up with a pot of money that you must manage for yourself.
Some of these benefits can be very valuable, we have seen instances of GARs being 15-17% per annum, that means that when the pension pot is converted into a guaranteed annuity then for every GBP1,000 invested the annuity provider will pay between GBP150 and GBP170 a year for the rest of the persons life. A lot of these policies were written in the 90’s when interest rates were much higher, and so now they are very valuable.
Similarly, before transferring out a final salary pension scheme and giving up the certainty in the payment (and the protection of the pension protection fund) you must be certain that the transfer value, the tax consequences and your future position are relatively certain.