Transferring Final Salary Pensions
Deciding whether to transfer a Final Salary (defined benefit) Pension Scheme to New Zealand can be difficult. UK Final Salary pensions offer a unique range of benefits, so any transfer of these funds to New Zealand requires careful consideration.
We are able to transfer most of these schemes to New Zealand, but always advise a thorough investigation based on your individual circumstances. Set out below are the main benefits and drawbacks of UK final salary pensions for residents of New Zealand.
1. Benefits at retirement age
UK final salary schemes provide a known amount, linked to earnings, at a known point in time.
In a New Zealand pension scheme, your final pension fund is determined by the performance of your investments. This may be more or less than the income that would have been provided to you in your final salary scheme, but you lose any guarantee of your level of income in retirement. While NZ is in a higher interest rate environment than the UK, investment returns from certain types of assets would be expected to exceed those from the UK. (We cannot of course guarantee how long this will be the case.)
In a UK final salary pension scheme, the member is limited to a maximum income of 2/3rds of final remuneration. (Most people are not with the scheme provider long enough to build up this entitlement.) Benefits from your final salary scheme are based upon a set formula in the scheme rules and not dependent upon investment performance.
In a New Zealand pension scheme, there is no cap on the level of income you can take; the size of your pension fund is determined by the performance of your investments.
With many New Zealand pension funds, you have a wide choice of investments available to you. A bespoke pension portfolio can be provided to meet your requirements, and you gain greater control of your investments.
2. Access to your funds before retirement age
In the UK, even when you reach retirement age the tax free lump sum you are able to take is limited to 25% with no tax-free cash allowed on the Guaranteed Minimum Pension (GMP) part of a final salary scheme.
In a New Zealand pension scheme, once QROPS reporting requirements have been fulfilled (and well before retirement age, subject to the age restrictions specified below) a tax-paid lump sum can be taken. This can range in size from 0% to 100% of the fund (some NZ pension schemes have a limit in place, but others are more flexible.)
We generally advise you to take no more than 40% before retirement age – but the final choice and implications of this decision do rest with you. There are no restrictions on what you use this lump sum to purchase.
At the retirement date of the NZ scheme the remainder of the fund can be taken as a tax-paid lump sum, or left invested.
In a UK pension fund, if you take early retirement your benefits are often reduced, typically by around 4% p.a. for every year before the scheme’s normal retirement date.
In New Zealand pension schemes, no such reductions apply. Some schemes stipulate that up to 40% can be withdrawn in the first year of early retirement, with the rest to remain invested for two years.
In 2010 the minimum age at which benefits can be taken from a UK pension rises from 50 to 55 years.
On transferring a pension to New Zealand, individuals who reach the age of 50 before the 5 year QROPS reporting deadline has passed are limited to a 25% lump sum. The remaining portion of the fund can be taken after the 5 year time frame. The rule applies from age 55 from April 2010.
3. Tax
UK pension funds are not taxed on their growth, although the tax credit on dividends can no longer be reclaimed.
New Zealand pension funds are taxed on the income produced (dividends and interest) and on some offshore capital gains. Income you take from your pension fund is then regarded as “tax-paid” – you will not be subject to any further New Zealand income tax charges. Please see our article on New Zealand tax on pensions for more information.
4. Inflation
Many UK final salary schemes have built in increases in payment linked for example to the RPI for inflation protection, up to certain limits, typically 3%.
In an New Zealand pension fund, you pension fund has the potential to continue growing while it is invested.
5. Guarantee of Income
In the UK, a guarantee is provided by the provision of Guaranteed Minimum Pension (GMP) and since 1997 Contracted Out Salary Related benefits (COSR). This guarantees to match the amount of SERPS pension where the scheme has contracted out.
In an NZ pension scheme, there is no similar guarantee. Your pension fund will increase or decrease according to the performance of your investments.
6. Passing On your Pension Fund
Many UK final salary schemes have a 50% spouse’s pension built in which starts paying out on the death of the member. (This benefit may be reduced or not available if you are single.)
In New Zealand pension funds, on the death of the member the fund passes to his or her estate. The entire pension fund therefore becomes an asset which can be passed on, rather than being lost to the pension company. However, no level of income is guaranteed to your spouse or other dependants.
Assets and investments held in a New Zealand QROPS pension scheme
are treated the same for inheritance tax purposes as assets held in a
standard UK pension scheme, and are therefore generally exempt from UK inheritance tax.
7. Taking pension benefits from a UK scheme while in NZ
If you do not transfer your final salary scheme to New Zealand, once you start taking benefits from your scheme they will fluctuate with currency exchange rates, and you will have to pay bank fees to transfer payments to New Zealand. We have been told of UK bank charges of up to the equivalent of $50 per month being charged – on a pension of $1000 per month, this equates to a 5% charge!
Once your pension funds are in New Zealand Dollars, and as long as you remain in New Zealand, you are not as exposed to exchange rate fluctuations.
8. Scheme Stability
If your UK final salary scheme is not adequately funded by the company the members’ benefits can be reduced. For example, The Royal Mail had to ask the UK government for a cash injection of GBP 3.9 billion to shore up their Final Salary Scheme in early 2007, and raised the retirement age by 5 years. This is one of the UK’s largest schemes. We have noticed over the past year or so more and more Final Salary schemes' funding is in deficit, which does place a risk on the future benefits for deferred members.
Final salary schemes are enormously expensive for companies to fund, so much so that very few UK companies now offer them to new employees. Some companies, even quite well respected, everyday names, are selling their final salary schemes to insurance companies.
NZ pension funds are held in trusts, and are subject to stringent reporting and fiduciary requirements by the New Zealand Government.
9. Ease of Administration
The responsibility lies with you to keep in touch with the administrators of your various pension funds. It can be difficult to keep track of several pensions over a number of decades.
If you transfer your pensions, you are able to consolidate various UK funds into one NZ pension plan for ease of administration. It is easy to keep up to date and in control.
10. Returning to the UK
If you do not transfer your pension funds to New Zealand, and you return to the UK to live for any reason, your pension funds will be where you left them.
If you choose to transfer your pension funds to New Zealand and you return to the UK to live your pension fund cannot be transferred back into your final salary scheme.
In Conclusion...
We believe that any decision you make regarding your retirement planning needs to be made from a position of knowledge. It is important to understand your options so that you can make the best decision for your situation.
We are happy to discuss your options with you and to assist you to make the best decision for your individual circumstances and financial goals. If you require in-depth analysis of one or more final salary schemes, we may charge a fee to cover our time, but any charges will be fully explained before they are incurred.
Please read on for information on transferring UK SIPPs pensions to New Zealand.
Please fee free to contact us if you have any questions about your UK pensions, and don't forget to order your free copy of our comprehensive UK Pension Guide.
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Pension Transfers 
Access to your funds before retirement age
