Tuesday, 17 August 2010

New Zealand QROPS

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 available from UK schemes and beyond the levels 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.

Setting the record straightIn 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 (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 make-up 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)