QROPS Pension Transfer Rules and Regulations

You'll notice throughout our pension transfer information that we mention QROPS, the HMRC and UK tax penalties several times - we thought we would take the opportunity to explain the requirements specified by the UK government for UK pension transfers to New Zealand.

1. What is a QROPs?
2. How does this affect you and your pension transfer?
3. How do the QROPS regulations work with New Zealand pension rules?
4. Are New Zealand QROPS legitimate?

What is a QROPS?

A QROPS is a Qualifying Recognised Overseas Pension Scheme – in basic terms, an overseas pension scheme which has permission to receive transferred UK pension funds.

QROPS came about as a result of sweeping pensions tax simplification in the UK, which came in on 6 April 2006. This day is knows as “A-Day” in the UK tax and pensions industry. Pension transfers are regulated in the UK by the HMRC, HM Revenue and Customs - the tax and customs department.  

Essentially, these regulations are designed to ensure that people who no longer live in the UK can only transfer their UK pensions to overseas pension schemes that have similar rules to UK pension schemes.

An overseas (non-UK) pension scheme can apply to become a QROPS if:

• It is a regulated occupational or personal pension scheme - pension schemes or superannuation schemes are regulated in New Zealand by the Government Actuary,
• It is open to people who live in the country where it is established - pension schemes in New Zealand are open to residents,
• The country in which the pension scheme is established does not give tax relief on pension contributions or most of the benefits are subject to taxation - no tax relief is given on contributions to New Zealand Superannuation schemes (other than the limited tax credits available through KiwiSaver),
• It is registered with the relevant tax authorities in the country where it is established - New Zealand schemes are registered with the Government Actuary and the Inland Revenue Department,
• It is established in a country with a Double Taxation Agreement with the UK that contains exchange of information and non-discrimination provisions - New Zealand has a long-standing double taxation agreement with the UK,
• Retirement benefits available to the member from transferred funds are available no earlier than they would be in a UK pension scheme - in New Zealand superannuation schemes the retirement age is usually at age 55,
• It will provide required information to the HMRC (on payments out of the scheme, transfers to other schemes etc.) - New Zealand QROPS schemes are obliged to report back to the HMRC any withdrawals of UK pension transfers from a New Zealand scheme if the scheme owner has been a UK tax payer in any of the last complete 5 UK tax years.

The HMRC maintains a list of QROPS that agree to have their details published on their website, which it updates twice a month. Any transfer or access to pension benefits that contravenes HMRC regulations within the five year QROPS reporting period will result in tax penalties of up to 55%.

How does this affect you and your pension transfer? 

The regulations are stringent, but only apply for the first five complete UK tax years that you are outside the UK. After this, the overseas pension scheme is no longer obliged to provide details of the transferred fund – the HMRC no longer regulates the pension fund.

This could be as much as 100% as a tax-paid lump sum, although in practice most NZ pension scheme providers will have their own limits on what you can draw down (normally around 20% or  40%). Some funds are more flexible than others, and you do of course have to keep in mind that you will need an income in retirement.

Assets and investments held in an HMRC-approved New Zealand QROPS 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.

How do the QROPS Regulations work with NZ Pension Rules?

The UK generously allows you to make contributions to your pension fund tax-free, but is then very restrictive about when and how you can take benefits from your fund.

New Zealand has a very different retirement savings history to the UK: there is very little tax relief available on contributions, but access to your fund (apart from retirement savings within the KiwiSaver retirement saving scheme) is generally far more flexible. It is relatively common practice for New Zealanders to take money out of a superannuation fund well before retirement.

As New Zealand pension funds are taxed as they grow, the income or lump sums you drawdown from your fund are regarded as tax-paid – you do not pay any further New Zealand income tax on them.

You really can “get the best of both worlds” by transferring your UK pensions to New Zealand.

Are New Zealand QROPS Legitimate?

Every couple of months we are amused to see an offshore financial adviser expressing serious concerns about the validity of New Zealand QROPS pension schemes, generally while pointing out that the QROPS that they are selling has no such drawbacks. Some of these pundits even go on to assert that New Zealand QROPS immediately (and illegally) allow you 100% access to your pension funds.

The HMRC rules are around which overseas pension schemes can become QROPS and when you can access UK pension funds that have been transferred to a QROPS are well defined and strict. QROPS have been around since 2006, and most of the concerns that were raised at the time of their launch have come to nothing - the HMRC clearly keeps a close eye on QROPS and acted decisively to remove QROPS status from Singapore pension schemes in 2008 - but the system seems to be working overall.

New Zealand QROPS are mainly aimed at Brits and returning Kiwis who have moved to New Zealand on a permanent basis, unlike other QROPS which are touted as tax-saving vehicles for the well-heeled. Interestingly, New Zealand has not needed to change its pension regulations to fit around the QROPS rules, unlike other well-known expat tax havens.

Read on for information on the one of the QROPS-approved  NZ pension funds we favour for our UK pension transfer clients.

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.