Up to $500 million could be queued-up to exit KiwiSaver schemes under new QROPS rules that came into force this month designed to set free funds caught in a UK tax-trap.
The legislative change allows KiwiSaver members to unlock funds transferred via UK qualifying recognised overseas pension scheme arrangements prior to June 17, 2015.
Until the 2015 cut-off date, several KiwiSaver schemes including AMP, NZ Funds, Booster and Milford accepted UK pension transfers as approved QROPS providers.
But following a UK tax ruling that stripped KiwiSaver schemes of QROPS status due to early release options (such as hardship withdrawals), migrant funds shifted under the process were effectively stranded.
Members affected by the QROPS rule-change faced swingeing UK tax imposts for transferring to another KiwiSaver provider.
Despite a sinking-lid process that would remove the tax risk for KiwiSaver members who have been non-UK residents for at least five years, the Inland Revenue Department (IRD) noted the issue still required remediation in a policy paper published ahead of the law reform last year.
“It is not known how many migrants still have problematic locked-in KiwiSavers,” the IRD report says. “… As some stakeholders have continued to push for a solution, we assume there must be a non-negligible number of individuals affected. However, it could be a few hundred.”
Industry estimates suggest about $500 million of QROPS money at the most remains trapped in KiwiSaver.
Nonetheless, the new rules that came into force on April 1 could see a flurry of transfers either to other KiwiSaver schemes or to NZ-based QROPS providers (where members can withdraw funds at age 55 rather than the 65 limit in KiwiSaver).
“There will be a decrease in the integrity of the KiwiSaver rules, in that QROPS funds are accessible at the age of 55 under current UK rules, rather than 65 under KiwiSaver rules,” the IRD paper says. “However, we think this is an acceptable compromise given that the issue is very limited.”
Murray Harris, Milford KiwiSaver head, said the scheme had not received any QROPS transfer requests to date.
“It could be that most members are happy to leave their retirement savings money where it is,” Harris said. “Or possibly they don’t realise the rules have changed. Either way, it’s a very small part of the Milford KiwiSaver funds under management.”
QROPS providers are likely to ratchet-up marketing to target UK pension money held in KiwiSaver schemes, however.
The sector may also see a boost from the 2026 financial year when another QROPS amendment comes into force. In the reform included in the same 2024 omnibus legislation as the KiwiSaver update, overseas pension transfers would be able to pay any UK tax charges within a QROPS scheme.
Currently, members have to pay any tax due on UK pension transfers to a NZ QROPS scheme out-of-pocket or face a catch-22 tax situation.
“… many UK emigrants who transfer their retirement funds to a QROPS after many years in New Zealand are met with a substantial tax liability which they struggle to pay without accessing the retirement funds,” the IRD says. “But doing so triggers UK tax charges. These create a barrier to QROPS transfers.”
The solution due to take effect from April 1 next year will introduce a ‘scheme-pays’ system where the QROPS provider processes the UK tax liability at a flat rate of 28 per cent compared to a charge of up to 55 per cent for individual withdrawals.
According to the IRD, the QROPS tax-quirk dissuades many UK migrants from transferring pension funds to NZ while also creating non-compliance issues.
“New Zealand is missing out on capital under the status quo,” the IRD says. “This outcome is also inconsistent with the purpose of the transfer rules, which is to remove any tax barrier to leaving funds overseas.”
The ruling will apply to pension transfers from all jurisdictions.
As at March 2021, the tax department counted 38 NZ QROPS schemes (about a dozen are broad retail providers) servicing 12,229 members in complying funds and 4,669 members in legacy schemes.
“In 2021- 22, 2,700 individuals reported receipt of a foreign superannuation withdrawals or transfer,” the IRD report says.