One of the most common questions I am asked to assist with is in respect of overseas pensions. When moving or returning to New Zealand, it is often the case that people will have qualified for, or at least commenced, a pension/superannuation scheme offshore. While Government/State pensions cannot be quantified and transferred in a lump sum, employment pensions can be transferrable. I am often asked what the tax implications are and should they withdraw them and bring them to New Zealand. This is generally a question I like to address alongside a tax expert of the country where the pension is based, to ensure what works in New Zealand is not going to cause large tax implications elsewhere, and vice versa.
There are many things to consider, and tax is just one of those considerations. For example, an early withdraw from a 401K results in a 10% penalty (which is not a tax) in the US, so this needs to be factored into any decision making. Some schemes may not be transferred, which is the case with some UK employment pension schemes, so the tax implications of keeping that pension in the UK needs to be determined but there is no choice to mitigate this. British pensions that can be transferred usually will need to go into a QROPs Scheme. We work with a number of providers that can assist with pension transfers (free of charge) to QROPs Schemes. We also get a lot of people with Inherited IRA’s (US retirement plans), and it is important to note that if the pension scheme is inherited, the tax treatment is often different to a pension that you personally have accumulated through your own contributions.
Where possible, it is worth looking at the pros and cons of moving the pension or retaining it, and you need to understand that tax outcome for each option as part of that decision making process. If you are in your first four years of tax residency (learn more about tax residency in our other articles) then you could be entitled to receive a tax-free transfer from a New Zealand tax perspective. In some cases, it is more beneficial to leave the pension scheme in the home country and pay tax in New Zealand on this. If the pension is later withdrawn as a lump sum this could be treated as a foreign superannuation withdrawal for New Zealand tax purposes. Instead, you may withdraw it periodically, in which case it is likely to be treated as a pension for New Zealand tax purposes. The tax treatment is different depending on all of the facts, such as the details of the pension, how it was accumulated, and how it was withdrawn.
It is also important to note that if you are receiving a pension (a regular payment) in your home country, but you are New Zealand tax resident, it is most likely that any applicable double tax agreement will assign primary taxing rights to New Zealand. Despite this, it is very common practice that the home country taxes the pension at source. We are regularly required to work alongside our clients and their home country advisors or directly with the home country revenue services such as HMRC, to ensure that the pension is received gross in the home country, and then tax is returned in New Zealand. A foreign tax credit will be available for any New Zealand tax paid where there is a home country tax imposed. It is often the case that we are not consulted until a number of years after the pension has been received. If New Zealand has primary taxing rights, then no foreign tax credit will be available in New Zealand in respect of the foreign tax as that is incorrectly withheld. In this case, you would have a tax bill to pay in New Zealand and would have to make an application to the home country revenue services in order to obtain that refund. This can be a lengthy process and can lead to a cashflow problem for a number of months, if not years.
While there are a number of foreign tax implications of having New Zealand pensions such as KiwiSaver, it is always worthwhile looking at the overall picture. While Americans may generally consider that there is a high level of compliance having KiwiSaver, if you are employed in New Zealand, you receive a benefit in terms of your employer’s contributions as well as the Government contributions. These may outweigh the compliance costs and make the “free money” worth the extra compliance. We work with specialist US tax advisors and regularly hold joint consults in order to ascertain the best pathway forward for our clients and their various pensions.
You may want to continue to contribute to your offshore pension scheme once you are in New Zealand. These contributions will generally be treated differently to the balance of the funds that were accumulated prior to becoming New Zealand tax resident. Again, this is not necessarily a reason not to contribute, but it is something that should be taken into consideration when deciding what to do with the foreign pension, and also in order to ensure it is correctly accounted for you in your New Zealand tax return. If you are generally a PAYE employee, Inland Revenue will not necessarily know about the pension and the contributions at the time they send out the tax information. If you confirm the tax summary, you may find you need to complete a voluntary disclosure to later correct your tax position.
In summary, there are a number of different types of pensions and they are all treated differently for tax purposes. The same type of scheme can be taxed differently depending on when the contributions were made, and by whom. People with a pension or superannuation scheme located offshore should seek tax advice early to allow as much time as possible for structuring in a tax efficient manner. This can avoid significant cashflow issues and leave you to retire with your hard earned money.
This article is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues please contact us.
This article was accurate at the time of publishing.
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