A tax shake-up could see British expats and international workers hit with a 33% tax bill if they live in New Zealand and have a Qualifying Recognised Overseas Pension Schemes (QROPS) in another country.
The proposals tidy up tax rules for foreign pension schemes by letting retirement savers decide whether to pay tax on a pension payment or on switching the cash to another scheme.
The issue will hit former UK residents or international workers with UK pension rights who switch their funds from the UK to QROPS.
Third party QROPS are popular with retirement savers, who can starta QROPS in one financial jurisdiction while living in another.
They are especially useful for expats or international workers who have not made a decision on where they will settle when they retire.
Pension simplification
Under the new proposals, retirement savers living in New Zealand with a third party QROPS will pay income tax on benefits and lump sum drawdowns at 10.5% to 33%, depending on their marginal rate and on a sliding scale of 0% to 100% of the QROPS fund, depending on how long they have lived in New Zealand.
This sliding scale is dubbed the inclusion rate.
The New Zealand Inland Revenue (NZIR) claims the proposals make tax on foreign pensions simpler for everyone.
The proposals were published in July, but the NZIR explained they are still subject to consultation before any new laws are drafted.
The rules expect to grant a ‘period of grace’ to expats moving to New Zealand. During their first two years in the country, the tax inclusion rate will be zero.
Checkered QROPS history
Full details of the proposals and some examples of how the scheme might work are on the NZIR official web site https://taxpolicy.ird.govt.nz/publications/2012-ip-foreign-super/chapter-3
New Zealand has had a checkered history over expat pensions and was considered one of the world’s leading QROPS destinations up to April 2012, when HMRC clamped down on alleged tax abuse and stopped a number of New Zealand QROPS providers from accepting new business.
Existing investors were not penalised, but cannot add funds to their pensions.
The main concern for HMRC was New Zealand Kiwisaver schemes could accept transfers from UK pension schemes and then in some circumstances pay all the fund straight out without charging any tax.
HMRC introduced special rules to plug the loophole when generally tightening up QROPS tax rules in April and May 2012.
