Holding foreign retirement savings is a Catch 22 situation. Whichever way you turn there are fish-hooks.
Tens of thousands of Kiwi residents have built up sizeable overseas retirement pots. Be they Kiwis by birth, or migrants, the question of what to do with those savings arises when they become residents here.
There's a whole industry of companies encouraging people to transfer UK private pensions to New Zealand. They are the single biggest group that transfers retirement savings to New Zealand. The pensions are transferred from the UK into qualifying superannuation or KiwiSaver funds here. Simple, huh?
Unfortunately not. There is a lot of confusion about bringing overseas retirement savings home. Making the wrong move can be costly.
For example, says Jeremy Henderson, an adviser specialising in migration at Hamilton International, some migrants who have transferred their British pensions to New Zealand with the intention of withdrawing the money have put themselves at risk of penalties of up to 55 per cent of the value of their pension to the British tax department, HM Revenue & Customs.
The New Zealand Inland Revenue Department has its own harsh rules when it comes to foreign pensions.* Even if the retirement fund is tax-free in its country of origin, Kiwi residents have to pay tax on the capital gains. The tax is based on the capital invested, not any income the pension funds produce, which can be extremely harsh for many taxpayers, says Murray Brewer, tax partner at Grant Thornton.
This issue mainly affects New Zealand residents who have lived and worked in Britain. Henderson points out that Australian superannuation can't yet be transferred to KiwiSaver, although that will come. Pensions from the United States can't be transferred here and he hasn't seen transfers from the other most relevant countries such as the Netherlands and Germany.
There is a dearth of independent information on the subject. Pension transfer companies extol the virtues of bringing that capital here. There's good money to be made running pension transfer companies and they don't tend to be quite so enthusiastic about explaining the downsides.
Lots of good reasons to transfer do exist. They include the fact that once the capital is in New Zealand the exchange rate risk is minimised. There is also no inheritance tax here.
But there are plenty of reasons why people might want to refrain from or at least delay transferring their pensions to New Zealand.
For example, once the capital is in a New Zealand KiwiSaver scheme the income is taxed, which it may not have been in the country of origin.
Another is that the kiwi dollar has been consistently high for several years, meaning the investor takes a hit by transferring an overseas pension or superannuation here.
Some funds do, however, allow investors to keep the money in foreign currency and wait until the exchange rate is favourable for conversion to New Zealand dollars.
What's more, it's hard for anyone emigrating or returning to New Zealand to guarantee that they will stay here for the rest of their lives. I know of two families at my children's schools who emigrated here, but had to return to their countries of origin because their elderly parents needed them. Had they transferred their overseas pensions here they could not send them back.
New Zealand superannuation and KiwiSaver funds have a reputation for high and sometimes hidden fees that eat into growth. Swapping to them could also mean sacrificing guarantees that may be built into a UK pension such as inflation-linked rises.
Pension transfer services take a large bite out of the incoming pension. This can be up to 5 per cent of the pension value, which can add up to tens of thousands of dollars. None of the companies' websites I visited mentioned how much they charge - usually a good indicator of a shock ahead.
Anyone considering a transfer should talk to an accountant and possibly an independent financial adviser, who does not just make a living from pension transfers.
New Zealand foreign investment fund (FIF) tax rules that govern the taxation of overseas pensions cause many taxpayers a huge amount of stress. Taxpayers who have more than $50,000 invested overseas in total - including the pension - must find the cash to pay tax on an investment they can't access.
Kiwis who own shares or other investments overseas will at least be receiving dividends and interest to fund the tax payment, or can sell down holdings to pay. Overseas pensions are mostly locked in.
What's more, losses in bad years can't be carried forward and any catch-up after a bad year is also taxed.
There are exemptions. There is a four-year exemption for new migrants and some returning Kiwis. Australian private superannuation funds left behind in that country are exempt. There is another difficult-to-meet exemption outlined in the IRD's IR257 guide, for retirement savings held in other countries.
Brewer says the majority of UK pensions, which a significant number of New Zealand residents hold, would not be eligible for the exemption outlined in that document.
He says there is large-scale non-compliance when it comes to paying tax on overseas retirement savings. Many taxpayers simply ignore the rules through ignorance. "Or they say, 'if you think I am paying New Zealand tax on my nest egg, you have another think coming'.
"The amount the Government collects is very small, but the cost of compliance is horrendous."
What's more, our rules are a disincentive for overseas people to emigrate here. Brewer cites the example of an executive who turned down a job when he realised that the tax hit on his overseas pension and shares in the first year would amount to more than his entire year's salary.
Since then the four-year exemption has been introduced. Even so, some high net worth individuals are not basing themselves here in New Zealand or are leaving in year five, he adds.
Many Kiwi residents with overseas pensions hope they just won't be caught. Some have their private pension distributions paid into overseas banks and access the money using credit and debit cards. The IRD, however, is clamping down on people with overseas bank accounts.
A spokesman for the IRD said tax information exchange agreements with other countries including tax havens enable it to identify the existence of offshore bank accounts held by New Zealand tax residents.
Taxpayers might get away with it before retirement. Once they retire, the IRD might just catch up with them and charge some rather hefty back (shortfall) tax and penalties.
One reason for the hard-nosed approach is that hidden income means the taxpayer may not be paying sufficient child support or student loan repayments and be getting Working for Families Tax Credits they are not entitled to.
Ironically, it can be advantageous to have pensions taxed using FIF once the person retires, says Brewer. Someone with a £1 million ($1.95 million) pension pot, who withdraws £50,000 a year and has a fund worth £950,000 at the end of the year, would have no tax to pay. However, they would have been paying FIF tax in the years leading up to retirement.
Had the fund been transferred to New Zealand there would have been tax to pay on KiwiSaver investment income while the fund was building up, but the withdrawals are tax-free.
*If this isn't complex enough for readers, the Government issued a discussion paper this week that, among other things, indicated that foreign pensions will be taxed on the way into New Zealand, backdated to January 2000. The calculation will be based on how many years the person has been living in New Zealand, says Brewer. Australian superannuation transfers would be exempt as would transfers in the first four years after a migrant or returning Kiwi moves here.