KiwiSaver: Tax shock for UK pension transfers

The move this year to drop KiwiSaver schemes from its list of qualifying overseas pension schemes comes with a tax hit for the unwary. Photo / File

Q: I recently moved my British pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) KiwiSaver provider after returning from Britain. We have pre-approval for the KiwiSaver first-home withdrawal and grant. Can we put all our contributions into our first home, even though Westpac has lost its QROPS status? Do Westpac report to UK Customs? Is it true I could face a 55 per cent tax bill?

A: The surprise move this year by Her Majesty's Revenue and Customs (HMRC) to drop KiwiSaver schemes from its list of qualifying overseas pension schemes comes with a tax hit for the unwary.

Up to 55 per cent could be applied to the withdrawal of funds from UK retirement schemes.

The April change was made because of concerns about people accessing their pension early to buy a first home or because of financial hardship.

It could also affect people wanting to switch KiwiSaver providers, or those whose funds are being wound up or merged.

Nigel Jackson, Westpac's head of investment products, explains further: "No KiwiSaver scheme qualifies as a QROPS and so [they] cannot accept any further UK pension transfers.

"Generally speaking, you can withdraw your UK pension money without incurring penalties after you have been a non-UK tax resident for at least five full consecutive UK tax years after leaving the UK.

"KiwiSaver schemes are still obliged to report to British revenue and customs any withdrawals made by a member who transferred UK pension money for at least 10 years after the money was moved."

Even if you leave the total transferred sum in your KiwiSaver account, funds withdrawn are considered to be taken from the UK pension and any withdrawal made within the relevant reporting period, including money taken to buy a first home, may incur a penalty.

"We strongly recommend getting independent tax advice from an expert experienced in relation to UK pension transfers," Jackson says.

"If a withdrawal is considered by HMRC to be an unauthorised payment it could trigger penalties of up to 55 per cent of the transferred amount."

KiwiSaver withdrawal rules apply as well, so to use it for a first-home purchase you need to have been with a scheme for at least three years.

Disclaimer: Information provided is stated accurately to the best of the respondent's knowledge at the time of publication. It is general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice specific to their situation before making an investment decision.

To have your KiwiSaver questions answered by the NZ Herald's panel of industry players, email Helen Twose. Sorry, but Helen cannot answer all questions, correspond directly with readers, or give financial advice.