Linda Sanders: catch your overseas windfall

by Linda Sanders / 05 December, 2013
Time is running out on a special offshore pension deal offered by the IRD.
If you’ve ever worked in the United Kingdom or elsewhere overseas, you could be in for a windfall worth thousands.

The money comes from what you paid into a superannuation fund and its increase in value since. But there’s also a catch: you’re meant to have paid tax on its growth in value every year – and most people don’t.

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Anyone who paid into a super scheme while they lived overseas is required to include their overseas pension in their tax returns each year. But because it relates to an increase in value, not cash in hand, and needs professional accounting to calculate, people have turned a deaf ear to the requirement. Others just don’t know about their liability.

The situation is best explained by an example given by Simon Swallow of Charter Square, which specialises in overseas pension transfers. A teacher who moved here in 2000 and had worked in the UK for 13 years on an average salary of £30,000 could expect a pension of £8800 a year. The transfer value of her super – the amount the British fund would pay out to a New Zealand scheme – was £146,000.

The topic is being highlighted now because the tax rules are changing next year (they’re at the select commission stage) for those with overseas pensions. The Inland Revenue Department is offering people a special deal until April, so if they transfer their pension to New Zealand they’ll pay tax on only 15% rather than up to 100% of what it’s worth. Our example teacher will save more than $32,000 in tax by transferring now.

At the core is the difference between our tax rules and those of other countries. We pay tax when we pay into a scheme, and on its growth in value over the years, but none when we withdraw the proceeds. Savers in most countries don’t pay tax on deposits or growth, but pay when they withdraw.

Swallow reckons the new rules affect more than 250,000 Brits, plus perhaps 150,000 Kiwis who’ve worked overseas. He says the issue is as big as the transtasman portability of Australian superannuation owned by Kiwis – and wonders why there’s not more noise about it.

The longer you leave your pension overseas, the more tax you’ll pay when you eventually bring those funds to New Zealand, either as income or to a superannuation scheme.

Under the new rules, if you’ve been in New Zealand for more than seven years you must declare 18.6% of its value as income, and the amount climbs by about 4% each year. By transferring a $100,000 pension now you’d save $1188 in tax at the proposed rate if you’ve been in New Zealand seven years, $12,359 in tax if you’ve been here 15 years and $28,050 if you’ve been here 29 years.

People will be surprised at the value of their pension; on average the cash equivalent transfer value is 15-20 times the value of the annual benefits.

What’s most amazing is if every pension, including those held by returning Kiwis, was transferred here, it would be a $10 billion inflow, Swallow estimates. And that’s just a drop in the ocean of the estimated £750 billion (NZ$1500 billion) total in unclaimed British pensions expected to accumulate by 2050.

Swallow advises people to transfer funds into a Qualifying Recognised Overseas Pension Scheme (QROPS) in New Zealand. The process takes three to six months, so time is running out. Getting good advice is important, though – with some schemes you may be better off keeping the money overseas.

As an aside, he believes the IRD should use the opportunity to promote inward investment by having a 0% amnesty, on the basis that once here, that $10 billion would potentially generate $100 million-plus in tax and give a big boost to the funds management industry. But the IRD says that would be unfair to those who’ve paid the tax in the past.

To find out if you have money in a UK pension fund, click here. To find out more about the legislation and its impact, click here.

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