Glossary of UK Pension terms

Annuity
If you have any form of personal or money purchase pension you have to buy an annuity before age 75. An annuity is an income paid to you for life by an insurance company in return for your pension pot. Once you have bought an annuity you cannot usually change your mind and switch to a different one at a later stage. Nor can you get your money back if you die the day after buying one because annuities work by a system of cross subsidy - those who die early subsidise those who live to a ripe old age. The advantage is that they will pay you an income no matter how long you live.

Approved New Zealand Superannuation Fund
Registered superannuation schemes that are subject to the New Zealand Superannuation Schemes Act 1989 and Securities Act 1978.

AVC (Additional voluntary contributions scheme)
You can supplement your pension contributions to build up an even larger retirement fund. AVC's attract tax relief on the premiums, but the final benefits are taxed as income. AVC's are better for basic rate taxpayers and Peps are better for higher rate taxpayers as a way of supplementing pension income. Employees are allowed to save up to 15% of your taxable earnings into a pension plan. When you retire the company is not allowed to pay out a cash lump sum.

Final salary or defined benefit schemes
This gives the employee a fraction of their salary on retirement for each year they have worked.

HMRC
HM Revenue & Customs www.hmrc.gov.uk

Investment trust pensions
These are pooled equity investments allowing you to pay pension contributions and enjoy the tax advantages.

ISA (Individual savings accounts)
Individual Savings Accounts (ISAs) were introduced on 6th April 1999 which replaced PEPs and TESSAs. ISAs are not an investment in their own right. They are a tax-free wrapper in which you can shelter investments. People over the age of 18 living in the UK can invest a maximum of £7,000 per year in each tax year. 16 and 17 year olds can invest up to £3,000 in a mini cash ISA.

Investment may be made in two components: equities and cash. There are strict limits on how much you can put in each component, and the limits depend in part on whether you use a 'maxi ISA' or a number of mini ISAs.
Until 5th April 2004 ISAs benefited from a 10% tax credit on UK equities. Stock and share investments which can be held in an ISA include unit trusts, open ended investment companies (OEICs), investment trusts, ordinary shares, preference shares and fixed interest corporate bonds.

PEPs in existence at 6th April 1999 may continue to be held outside an ISA with the same tax advantages. TESSAs in existence at 6th April 1999 are allowed to run their full five year term.

Income from ISA investments is tax free and you don't have to report it on your tax return. Capital gains are also exempt from CGT.

Lifetime Allowance
A standard lifetime allowance is the maximum amount of pension savings that can benefit from tax relief. This figure rises over time and the proposed amounts are as follows:
2007 - £1.6 million
2008 - £1.65 million
2009 - £1.75 million
2010 - £1.8 million

The standard lifetime allowance is based on the approximate amount of money that would be needed to purchase a pension equal to the maximum HM Revenue & Customs (HMRC) would permit under the tax regime. Funds in excess of the lifetime allowance are felt to have benefited the individual unduly from pension scheme tax advantages and therefore a tax charge is made. Funds taken in excess of this will likely be taxed at 55%.

Money-Purchase or defined benefit schemes
This is where the employee and employer have contributed a set percentage of the employee's salary into the scheme. At retirement an annuity is paid out.

PEPS (Personal Equity Plans)
It is no longer possible to start a new PEP or add to an older one. Personal Equity Plans (PEPS) are investments that are totally tax exempt, both on the capital and income side.

PIE (Portfolio Investment Entity)
The QROPS funds we recommend for your UK Pension Transfer are PIE approved investments. From October 2007 taxation of New Zealand managed funds was changed to PIE. Capital gains on New Zealand and Australian (some exceptions) equities are exempt and income is taxed at the investors marginal tax rate. From April 2008 maximum tax is 30% even for a 39% tax payer. International investments are taxed under the Fair Dividend Rate method (FDR) tax at the investors marginal tax rate on the opening value plus 5% growth.

QROPS (Qualifying Recognised Overseas Pension Scheme)
HMRC require any pension transfers to go into a QROPS registered scheme. If this is done incorrectly you will be subject to a 55% withdrawal tax.

SIPPS (Self-invested personal pensions)
SIPPS offer greater flexibility than ordinary personal and occupational pensions. You can have many types of investment in them, including British and foreign stocks, unit trusts, investment trusts, managed life funds, unit linked funds and commercial property. They have the same tax relief as ordinary personal pensions.

SERPS (State Earnings Related Pension Schemes)
Part of the National Insurance contributions goes towards your SERP which is paid out on top of your state pension when you retire.

TESSA ( Tax Exempt Special Savings Account)
These lasted for five years and you were allowed to invest up to £9,000 over the life of each account. You got all your interest tax-free and once your five years were up you could either take your money or put your money into a new TESSA account (and continue to receive tax-free interest). The last day you could open one was 5 April 1999, so there aren't any TESSAs in existence any more. But you were allowed to roll a TESSA that matured between 6 April 1999 and 5 April 2004 into what is known as a TESSA-Only ISA (or TOISA for short) so that you could continue to receive tax-free interest.

FAQ: UK Pension Transfer

For an explanation of terms frequently used please refer to the Glossary page.

What criteria is required to transfer my UK Pension?
You have to have permanently emigrated to New Zealand with no intentions of returning to the U.K. You must have either have been granted permanent residency or have submitted an application.
Should I transfer my UK pension fund to New Zealand?
For many UK ex patriots your pension fund will be the second biggest "investment" after your home.
Refer to "Reasons to transfer my UK Pension".
Do I have to have a super scheme in NZ to transfer my UK pension into?
Yes. If you decide to transfer your UK pension funds, UK regulations require that they must be transferred to an approved or registered superannuation scheme in New Zealand.
Should I transfer my UK pension fund to NZ, even if I think I may return to the UK to retire?
No. Once you have made the transfer to a NZ pension you cannot transfer back to your UK pension plan as if nothing had happened, you have given up all your rights to your UK pension.
Who handles my money and how safe is it? All transfers are paid directly by your UK Pension fund into the New Zealand HMRC QROPS Approved superannuation fund. We do not use a trust account or handle your money.
How long does it take to transfer my UK Pension?
Each pension transfer is different as each individual has different circumstances. The rule of thumb is that a normal transfer will take between 3 to 4 months (the shortest 6 weeks and the longest 12 months). Generally the delay is the UK pension provider arranging transfer papers and confirming transfer figures.
What are the main benefits to transferring my UK pension to New Zealand?
- Enables you to keep track of your pension plan and gain more control of your funds without affecting their earning power. You won't need to be concerned whether the fund is merging, closing or going out of existence.
- You no longer need worry about exchange rate fluctuations affecting your pension payouts.
- You will not be paying bank fees for each transfer (may be as a high as £18 per transfer)
- You will have more information and control on the companies holding your retirement savings.
- Easier to access your money in retirement.
- If you die with a UK pension scheme your spouse can get up to 2/3 of the pension you would have received. If you both die your pension dies with you, however, If you both die leaving qualifying dependent children , your UK pension could continue for as long as you fulfill the schemes eligibility criteria. With New Zealand superannuation plans all of your remaining investment becomes part of your estate and is passed on to your children, heirs.
What are the tax issues that need to be considered?
- Under the new FDR rules introduced in New Zealand in April 2007 your UK pension is exempt tax.
- If you retain your UK pension and it pays a regular benefit this is deemed income and you will need to pay tax on it in New Zealand.
- If your funds are transferred to a NZ approved superannuation plan under current legislation you are not taxed when you withdraw funds.
Can I get my UK pension paid directly into my bank account?
No, it is a requirement of the UK legislation that the money can only be paid into an approved New Zealand superannuation plan.
Do you charge a fee for your pension transfer service?
Emphatically YES, because you need impartial advice on such a complex and important issue. If it is in your best interests to retain the status quo we want to be able to say so, but receive remuneration for the time and experience involved in assisting you to reach that decision. Should you ultimately transfer your benefits to New Zealand we will, at your request offset our charges against any initial commission received, with any excess being reinvested. Or reinvest all the initial commission and charge you separately. We do not charge a fee and take initial commission. Contact Alison Renfrew at Alison@LYFORDS.co.nz .
Why don't I just transfer the pension myself?
You can transfer the pension yourself, but the process is complex, and can be very frustrating and confusing. Do you have the necessary understanding of your actions and how they might impact on your future financial security? If you get it wrong it could cost you thousands of pounds. Our UK Pension Transfer service will save you time, money and stress.
I have already started to draw income from my UK pension can I still transfer the lump sum?
No, once your pension is being paid out as regular income you can no longer transfer what would have been a lump sum.
Will I be eligible for New Zealand Government superannuation payments?
To be eligible for New Zealand Superannuation you need to be aged 65 or over and a legal resident of New Zealand, having lived here for ten years since age 20. Five of those years have to be since you turned age 50. Contact Work and Income Support on 0800 552 002 or at www.winz.govt.nz. For current after tax rates of New Zealand Superannuation click here.
Should I transfer my UK pension to a NZ Superannuation plan before I leave the UK?
No, you need to be a permanent resident in New Zealand before your UK pension plan can be transferred. We recommend waiting until you are living and working in New Zealand before you make any sort of decision on this. At present entitlement to New Zealand superannuation is not asset tested. The NZ Government will off-set pension income you are paid by the UK Government against your NZ super entitlement. How much would I get if I qualify for New Zealand superannuation?
Can I withdraw cash from my pension fund once the transfer is complete?
Yes, but this is dependent on restrictions imposed by your UK scheme. It may be possible to take up to 60% in cash, but sometimes the transferring scheme can insist that the whole amount is 'locked in'. This is an area often abused by some New Zealand advisers and getting it wrong could result in penalties being applied. Our recommendation is that your UK pension money was saved for your long term retirement savings so keep to this plan and put it aside for your retirement savings. Besides if the UK Government gets to hear that this facility is being abused it may rescind the regulations permitting it!
UK Pension Simplification Rules 2006 - How will they affect your Pension Transfer?
On the 6th April 2006 the new "pension simplification" regulations came into effect in the UK.
Under these rules every overseas pension fund that wants to accept transfers from the UK must be approved as a "Qualifying Recognised Overseas Pension Scheme" (or QROPS). All QROPS will have to report back to HMRC any payment made to a member in respect of the amount that was transferred from the UK. This will include the date, amount and "nature of the benefit" and the current address of the member.

Note: HMRC will apply a 40% tax on the transfer value if the UK pension is transferred to a non QROPS.

The new regulations state that the earliest retirement age (the earliest age at which funds can be withdrawn) is to rise to 55 years. In addition the maximum withdrawal in the first year will be limited to 25% of the pension without incurring any tax liability. Anything above this will incur a tax liability of 40%. To be a QROP reporting of all withdrawals is required to be provided to the UK authorities. Additional contributions and/or investment growth are not subject to the UK tax penalties.

Please also refer to the "7 traps of transferring your UK Pension".

UK Pension Transfer Traps

The 7 Traps to Transferring Your UK Pension Funds

There are very good reasons for transferring your UK Pension to New Zealand. But you will see after reading the section "Comparison between NZ and UK Pensions" that there are some differences.

When transferring your UK pension there are some simple Transfer Traps to avoid.

Pension Transfer Trap One

From 1 April 2006 pensions from the UK must be transferred into a Qualifying Recognised Overseas Pension Scheme (QROPS). If you transfer your pension into a non QROPS scheme you will have to pay UK withdrawal tax of up to 55%. We transfer your UK Pension into HMRC approved QROPS funds.

Pension Transfer Trap Two

If you withdraw money from a QROPS before 6 years are up you may be up for an unauthorised payment charge. This is a UK Tax charge and can be up to 55% of the amount withdrawn. QROPS approved New Zealand superannuation fund managers do not want to loose their QROPS approval status. One of the requirements to continue to be approved is that the NZ scheme must notify the UK authorities of any withdrawals.

There are some exemptions to this which you may qualify for, we can discuss this with you.

Pension Transfer Trap Three

Once you start drawing down on your pension fund in the UK it cannot be transferred to New Zealand. You need to be a permanent resident of New Zealand before you can transfer your UK pension and you must not have started to draw down.

Pension Transfer Trap Four

Delaying your decision because of the exchange rate. If you have concerns about the exchange rate then discuss this with us. We can give you a consensus of the 18 month outlook for the UK/NZ exchange rate. There are many factors impacting the exchange rate. If you are really concerned we can transfer your funds and retain them in UK pounds until you instruct us to transfer into NZ dollars.

Pension Transfer Trap Five

The Savings Trap. After transferring your UK Pension to New Zealand you may want to continue saving. If you save into the scheme you used for the transfer, and you later decide to make a withdrawal within six years, any withdrawal will be treated as withdrawing the UK portion first. You could be liable for the 55% tax charge on the amount withdrawn. Solution save into a separate scheme.

Pension Transfer Trap Six

Being too Conservative. If you are retired we recommend a "balanced" risk/return profile. This is a 50:50 mix of growth (shares, property and future funds) and income (cash, fixed interest). Even at 65 you probably have another 25 years of investing. You need to make sure your investments and retirement income is inflation hedged. If you are younger than 55 a "growth" risk/return profile may be more suitable. We will discuss this with you.

Pension Transfer Trap Seven

Not reviewing your investments. We believe its important to keep track of your investments and review asset allocations to ensure your risk/return profile stays within its limits. We will provide six monthly reports and an annual review.

Taxation Issues UK Pension Transfers

Taxation Issues UK Pension Transfers to NZ

Under current tax legislation in New Zealand (NZ) all earnings from Superannuation funds are taxed at 33%. All benefits/withdrawals are tax free.

Generally there is no tax payable when a UK pension fund is transferred into a New Zealand approved superannuation fund - refer to FIF exemptions below.

If your UK pension fund is employment or self employment related and you only made contributions to it before you became a resident of New Zealand, then you will be exempt from Foreign Investment Fund (FIF) Regulations.

If you acquired an interest in a UK pension fund which was NOT employment or self employment related before you become a resident in New Zealand you will be exempt from the FIF regime for the rest of the income year in which you first become resident, and for the next three income years.

After this exemption period has expired, you are then required to declare your interest in your UK pension fund to the New Zealand Inland Revenue. Income tax will then be levied on any gains the fund makes each year.

There is a possibility that should you leave your pension fund in the UK and at retirement take the Tax Free Cash sum, this may be subject to tax in NZ, even though you have left your funds in the UK. New Zealander's are taxed on their world-wide income.

So the tax advantages to transfer are:

You simplify your tax calculations
You remove the tax and exchange rate uncertainties
You pay no tax on the proceeds from the New Zealand superannuation plan.

UK Pension Simplification Rules 2006 - How will they affect your Pension Transfer?

On the 6th April 2006 the new "pension simplification" regulations came into effect in the UK.

Under these rules every overseas pension fund that wants to accept transfers from the UK must be approved as a "Qualifying Recognised Overseas Pension Scheme" (or QROPS). All QROPS will have to report back to HMRC any payment made to a member in respect of the amount that was transferred from the UK. This will include the date, amount and "nature of the benefit" and the current address of the member.

Note: HMRC will apply a 40% tax on the transfer value if the UK pension is transferred to a non QROPS.

The new regulations state that the earliest retirement age (the earliest age at which funds can be withdrawn) is to rise to 55 years. In addition the maximum withdrawal in the first year will be limited to 25% of the pension without incurring any tax liability. Anything above this will incur a tax liability of 40%. To be a QROPS reporting of all withdrawals is required to be provided to the UK authorities. Additional contributions and/or investment growth are not subject to the UK tax penalties.

NZ Taxation Rule Changes April 2006

After 1 April 2006 new migrants and returning New Zealanders who have not been tax-resident for at least ten years will be exempted from tax for four years on foreign income such as dividends, interest, royalties and rental income.

The ten year requirement is designed to ensure that New Zealand residents do not leave the country just to become eligible for the exemption.

The changes are part of the Taxation (Depreciation, Payment Dates Alignment, FBT and Miscellaneous Provisions) Bill.

Taxation Rules

Taxation Changes NZ: April 2007

Before Immigrating to NZ

Here are some suggestions if you haven't already immigrated.

Set up a Family Trust before you immigrate
In the UK for the 2007/2008 tax year, the Inheritance Tax Rate is 0% on the first £300,000 (the "nil-rate band), and 40% on the rest of the value, at death, of an individual's tax estate. The nil rate band rises annually; tax is only payable on the value of an estate above the nil rate band. In the 2007 budget report the Chancellor announced that the nil rate band is to rise to £350,000 by 2010. This is to take into account the sharp rise in house prices in the United Kingdom over the previous few years.

In New Zealand individuals are taxed on Gifts over $27,000 per year, but there are no death duties. If you set up a Family Trust after you immigrate to New Zealand it is a slow process to transfer your assets across and forgive the debt.

Contact LYFORDS and we can put you in contact with an Independent New Zealand Trustee company experienced in setting up Family Trusts and what Estate Planning considerations you should take before you immigrate to New Zealand.

For a description of how Discretionary Family Trusts could benefit you, please refer to our main web site www.lyfords.co.nz.

Schooling
Education Review Office - the Government department which reports publicly on the quality of education in all New Zealand schools and early childhood centres.

Estate Planning
In the UK an Enduring Power of Attorney (EPA) will cost around £80-700 and it will have to be registered through the courts. This is not the case in New Zealand and an EPA costs approximately $80.

You should consider who will be the Guardians of your children, Executors of your estate in New Zealand.

We can arranged for a reputable Trustee company to set up your, EPA, Wills and Family Trust before you leave the UK which would comply with UK and New Zealand laws.

Comparison between UK and NZ Pensions

With a UK Pension

You can receive a lump sum when you reach your pensionable age. This is limited to 25% of the value of your pension fund, or for occupational pension schemes based upon a formula involving salary and service. This latter formula is being done away with in respect of service from April 2006, under the UK Government's Simplification Programme.
If you die with a UK pension scheme your spouse can get up to 2/3 of the pension you would have received. If you both die your pension dies with you, however, If you both die leaving qualifying dependent children , your UK pension could continue for as long as you fulfill the schemes eligibility criteria. With New Zealand superannuation plans all of your remaining investment becomes part of your estate and is passed on to your children, heirs.
Your payments from your UK pension funds will be affected by exchange rates and bank transfer charges.
New Zealand Inland Revenue assesses worldwide income as taxable income even if your investments are invested in tax havens. You may receive a tax credit for any income tax already deducted in the UK.

With a NZ Pension

At age 65 you will receive a state pension (New Zealand Superannuation) if you have lived in New Zealand for a total of 10 years since you turned 20 and a total of 5 years since you turned age 50. Any UK state pension will be offset against (deducted from) your New Zealand superannuation entitlement.
You can draw down on your investments usually from age 60 (depending on the requirements of the Trustees) and this is not regarded as assessable income for tax purposes. You can set your own income level.
Your personal superannuation savings (not the Government's New Zealand Superannuation) are part of your estate on death.

Considerations and Requirements UK Pension Transfer

Have you Considered?

Does my plan contain valuable options?
Does my plan guarantee predictable benefits at retirement, regardless of the future movement of UK interest rates and investment returns?
If I take my benefits as a transfer value now, what rate of return would my Superannuation need to achieve in order to replicate the benefits I have given up?
What percentage of my overall retirement provision is tied up in my UK pensions?
What are the death benefits available from the arrangement, should I die: before normal retirement date? after normal retirement date?
What are the costs associated in making an informed decision?
Where is my pension fund invested in the UK? If I keep it there does it continue to meet with my attitude to investment risk?
What is the current strength of the insurance company it is invested with? Do they still exist?
What are the ongoing charges, if any, of my pension arrangement?
How well or badly has my chosen fund(s) performed against its peers?

Requirements

To transfer any UK Pension Benefits to New Zealand, the following requirements must be met:

Permanent departure from the UK with no intention of returning to work or retire;
Employment or self-employment in New Zealand;
New Zealand residency for tax purposes;
No part of the UK Benefit commenced paying a pension;
Payment directly from the UK scheme to an HMRC, QROPS approved New Zealand superannuation fund.

Some reasons for transferring your UK Pension to NZ

We believe that the reasons for transferring your UK pension to New Zealand far out-weigh leaving it with your UK pension's administrator.

No Tax: When you transfer your UK pension to New Zealand you will be able to take the full benefit of your pension at age 60 tax free. If the funds remain in the UK, any pension income stream will be assessable as income and taxed at the marginal income tax rates.
Control: Enables you to keep track of your pension plan and gain more control of your funds without affecting their earning power. You won't need to be concerned whether the fund is merging, closing or going out of existence, issues that are not uncommon to UK pension schemes.
Flexibility: In New Zealand, there is no requirement to purchase a life pension/annuity. You will be able to draw your benefits as a retirement income (allocated pension), as a lump sum or as a combination of both.
From April 2006 simplification rules came into effect allowing transfer of UK Pensions to HMRC, QROPS approved schemes in New Zealand. At the moment the UK Government is allowing pension transfers, but how long will this continue? The Australian Government does not allow pension transfers out of Australia unless you are on a temporary work permit.
You may be able to transfer your British pension to New Zealand and access up to 40% of the value immediately. This will be dependent on the specific requirements of your UK Pension plan.
You no longer need worry about exchange rate fluctuations affecting your pension payouts.
You will not be paying bank fees for each transfer (may be as a high as £18 per transfer)
You will have more information and control on the companies holding your retirement savings.
Easier to access your money in retirement.
If you die with a UK pension scheme your spouse can get up to 2/3 of the pension you would have received. If you both die your pension dies with you, however, If you both die leaving qualifying dependent children , your UK pension could continue for as long as you fulfill the schemes eligibility criteria. With New Zealand superannuation plans all of your remaining investment becomes part of your estate and is passed on to your children, heirs.

We have experience in handling the transfer of British pensions to New Zealand, if it is appropriate. We liaise directly with your UK pension schemes. Please note that not all schemes can be transferred. The transfer will need to be into an HMRC approved QROPS registered New Zealand superannuation fund.

If the funds are transferred to a non registered fund in New Zealand a UK tax of 55% could be imposed on the funds being transferred.

If you have started to take a pension from your scheme this can not be transferred.

The UK State Pension cannot be transferred.

UK Pension Transfer to NZ

UK Pension Transfer to New Zealand

It is important to seek good, experienced advice. To transfer UK Pensions to NZ Lyfords uses HMRC, QROPS approved funds. This avoids the risk of potentially being taxed up to 55% on the transfer value of your UK Pension.

Use our specialist knowledge to make an informed decision on whether to transfer your UK Pension ("superannuation") - UK Pension Transfer to NZ- to a New Zealand superannuation ("pension") fund.

In the UK, Pension plans are only lightly taxed while saving for retirement, but the income received is assessable for taxation.

In New Zealand (NZ) superannuation funds are taxed along the way and the capital at maturity is tax free and generally not locked in.

You may be able to transfer your UK Pension to New Zealand and access up to 40% of the value immediately.

Fact Finder Form

Reasons for Transferring

Pension Transfer - - enables you to keep track of your pension plan and gain more control of your funds without affecting their earning power. You won't need to be concerned whether the fund is merging, closing or going out of existence.

From April 2006 simplification rules came into effect in the UK enabling a much wider range of permitted investment.

Click here to read more .....

What You Need to Know

Does my Pension plan contain valuable options?

Does my Pension plan guarantee predictable benefits at retirement, regardless of the future movement of UK interest rates and investment returns?

Click here to read more .....

FiNZ Financial Intelligence

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