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QROPS - New Zealand in focus.
Much has been written about Qualifying Recognised Overseas Pension Schemes (QROPS) in the press and on the web. Some of the articles I have seen are helpful and accurate, others are less so. The purpose of this article is to set out how QROPS in New Zealand operate in the context of UK and New Zealand law.
The relevant UK law is to be found in the Finance Act 2004, and the accompanying regulations, in particular "The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006" (SI 2006 / 206).
New Zealand law is to be found in the Superannuation Schemes Act 1989.
The key attractions in transferring UK pension rights to a QROPS are, the avoidance of the effective compulsion to secure income with an annuity by age 75, and the ability to pass on the benefit of the member’s pension fund to nominated beneficiaries after death without the burden of taxation. New Zealand schemes are also able to offer capital distributions beyond the levels that are available from UK schemes and beyond the levels that are available from most other QROPS jurisdictions.
Some QROPS trustees in other jurisdictions have been rather disingenuous about how New Zealand pension schemes work and their QROPS status. It is time to set that record straight.
In terms of SI 2006/206 a key condition is that of tax recognition. By that is meant tax recognition in the country where the QROPS operates.
The tax recognition requirements are described as Primary conditions 1 and 2, and conditions A and B. To meet the tax recognition requirements the overseas scheme must meet both Primary conditions, and one of conditions A and B.
Primary condition 1 states the overseas scheme must be "open to persons resident in the country or territory in which it is established". New Zealand Superannuation schemes and Kiwisaver Schemes are open to New Zealand residents.
Primary condition 2 is concerned with how local residents (that is New Zealand residents in this instance) receive tax privileges on their pension savings. In other words the nature of the New Zealand pensions system.
There are two possibilities that each satisfy Primary Condition 2 :
(i) A system where local residents get tax relief on their pension contributions, and benefits when taken are taxed or (ii)A system where local residents do not get tax relief on their pension contributions and benefits when taken are not taxed.
New Zealand resident members of New Zealand pension schemes do not receive tax relief on contributions and are not taxed on the emerging benefits. On achieving the scheme retirement age a retirement benefit may be taken from the scheme as income or as a capital sum. New Zealand schemes therefore satisfy Primary condition 2.
However New Zealand pension funds are taxed on income and capital gains. The provisions are complex and depend on the asset makeup of the fund. But to think in terms of an effective tax charge of about 1.5% p.a. on the fund value is about right. The New Zealand Government is expected to remove this tax charge later this year.
Now to Conditions A and B - the Overseas scheme only has to meet one of these.
Condition A is that the Overseas scheme "is approved or recognised by, or registered with, the relevant tax authorities as a pension scheme in the country or territory in which it is established".
New Zealand pension schemes meet this requirement so we need not trouble ourselves with Condition B.
This is because Condition B only applies if "no system exists for the approval or recognition by, or registration with, relevant tax authorities of pension schemes in the country or territory in which it is established" and sets out that in the absence of such a "system" the Overseas scheme must provide that at least 70% of the fund is available to provide an income for life” (the 70% rule)
New Zealand has a Double Taxation Agreement (DTA) with the UK. A DTA which in terms of Regulation 3 of SI 2006/206 "contains provision about (i) the exchange of information between the parties, and (ii) non-discrimination".
In the absence of such a DTA Regulation 3 stipulates that the Overseas scheme would need to satisfy the 70% rule. The existence of a DTA between the UK and New Zealand means that New Zealand pension schemes satisfy the requirements of Regulation 3 without having to satisfy the 70% rule.
Following a transfer of UK pension rights to a QROPS, and the taking of benefits before the member has been non UK resident for more than five complete tax years, that benefit payment is reported to HMRC. If benefits are taken that exceed those permitted under UK rules an unauthorised payment charge of 55% is levied. But after five complete tax years the requirement to report payments cease and the possibility of a penalty payment is extinguished.
This is true so long as the QROPS is not an "investment regulated" scheme. If the QROPS is "investment regulated" then payments from the scheme are reportable indefinitely. An unauthorised payment charge will then apply if investment is made into “taxable property” (most notably residential property), or if a transfer is made from the QROPS to a non UK scheme which is not also a QROPS.
New Zealand law does not allow for members to direct fund investment, it only allows investment choice from a menu of options. Thus New Zealand QROPS are not "investment regulated".
If payment is made from a New Zealand QROPS when the member is not tax resident in the UK and has neither been UK resident in that UK tax year nor in any of the previous five tax years then it will not give rise to an unauthorised payment charge.
A final word... I and others at about the same time noticed a possible issue in respect of a particular type of New Zealand pension scheme called a Kiwisaver Scheme. These schemes receive a minor element of tax subsidy and so there was a niggle as to whether they met Primary condition 2 in SI 2006/206. If this condition was not met then those Kiwisaver Schemes which had been notified to HMRC as meeting the conditions to be a QROPS risked having that status removed.
Although this would not have affected the bulk of New Zealand Superannuation schemes registered as QROPS, and which are widely used to receive transfers from UK pension funds, it was feared that the removal of QROPS status from Kiwisaver Schemes might taint the entire jurisdiction.
As a consequence the New Zealand Government actuary (GA), who deals with the regulation of New Zealand pension schemes, met with HMRC on a trip to the UK. HMRC have subsequently written to the GA confirming that Kwisaver Schemes are deemed to meet the requirements of the QROPS regulations.
This confirms the ongoing status of New Zealand as a leading QROPS jurisdiction.
Please do not hesitate to post any comments or questions below – alternatively, you can contact us directly by clicking on our logo (above).
More Blogs By Stephen Ward BA (Econ), ACII, APMI, APFS, AIFP
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Blogs From Premier Pension Solutions SL
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- New Zealand QROPS : Only Available For A Further 12 Months ?
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- QROPS Jurisdiction in Focus : Guernsey
- QROPS - the realities of giving and receiving advice
- QROPs - Choice of adviser and choice of jurisdiction
- Why not spring clean your pension ?
- New Zealand QROPS - some of our FAQ's
- Access Your UK Pension Fund Before It Falls In Value !