Case Study: Transferring a UK Final Salary Scheme to a NZ ROPS (Mike)

Mike’s Story

It is a common view that those in a UK Final Salary Scheme should not transfer their pension to any other type of scheme. Mike, a 46 year old immigrant from the UK came to see Saturn adviser Steve Baker to explore his transfer options thoroughly before making a decision.

 

Mike immigrated to New Zealand three years ago and although he is single, has two financially dependent children, Brad aged 19 and Jennifer aged 17. Mike is settled and happy living in New Zealand and has no intention of returning to live in the UK. His NZ tax rate is 33%.

 

Working with Steve, Mike set out to refine his goals and his ideal scenario with regards to the pension transfer:

 

  1. Retire at age 55
  2. Minimise his tax position
  3. Ensure his children continue to receive his pension benefits should Mike die

 

Mike felt that these three issues were more important to him than the intended guarantees offered by his UK pension scheme.

 

With regard to the three main goals Steve confirmed the following:

 

RETIREMENT AGE

 

The New Zealand ROPS allows Mike to take retirement at age 55 without penalty. In contrast, if Mike remains with his UK scheme his benefits will reduce by 4% for each year that he retires before age 65. If Mike retires at his desired age of 55 both his income and lump sum benefits are reduced by 40% and that is before he pays New Zealand tax.

 

TAX EFFICIENCY

As Mike has lived in New Zealand for less than four years (the transition period for new immigrants) he is able to transfer his UK scheme benefits free of both UK and NZ tax.

 

After four years of residency in NZ any benefits drawn from Mike’s UK scheme would attract NZ tax at his marginal rate of 33% meaning that the income ‘guarantees’ offered by his UK scheme are effectively discounted by 33%.

 

PENSION BENEFITS FOR MIKE’S CHILDREN

Mike’s UK scheme offers a 50% spouses pension on Mike’s death but as Mike is now single this does not apply.

 

His UK scheme will pay a pension to his children of 25% (half of that available to a spouse), however this benefit ceases when the child turns 18 or finishes tertiary education. Brad cannot access this benefit as he is over 18 and not at university. Jennifer is planning further study which she will complete at aged 21 in four more years.

 

In other words should Mike die in the next few years only Jennifer will qualify for a small pension which will then end when she is 21. If Mike transfers to the NZ ROPS he is able to pass the full value of his transferred pension on to both of his children.

 

OTHER CONSIDERATIONS

In addition to Mike’s main goals Steve discussed some other issues regarding the pension transfer.

 

Index linked benefits: The UK scheme offers Mike an income that is linked to the rate of inflation in the UK. As Mike will retire in NZ he wants his pension fund to take account of NZ inflation not be linked to an economy overseas (which may see him lose money in real terms).

 

Foreign Exchange Risk: Transferring his pension to New Zealand insulates Mike’s monthly income from currency fluctuations. If income is paid from the UK it will vary each month along with the exchange rate.

 

 So despite the potential advantages of Mike’s final salary pension scheme his unique combination of circumstances meant that a transfer would fulfil more of his financial goals. Mike went ahead with his transfer to the New Zealand scheme with Steve Bakers assistance.

 

Pension transfer is an extremely complex area with very individualised costs and benefits. You should seek specialised advice from a suitably qualified financial adviser before proceeding.

 

 * Registered Overseas Pension Scheme, approved by Her Majesty’s Revenue and Customs (HMRC)