Advisers in New Zealand have formed a working party to look into the potential misselling of QROPS. Rex Cowley, head of marketing at Close Asset Management, gives us the lowdown...
Currently in New Zealand it is common practice for an individual to be able to access their full retirement savings and this is indeed common practice in other parts of the world such as Australia and South Africa.
Obviously, this is very counter-culture to the UK where pensions are effectively written into trust. The member only has a contingent right to these monies; the right to access a range of benefits typically being a lump sum and income stream provided that they are still alive by the time they reach retirement date. So, they do not have the ability to cash the pension because the money is not theirs, just the right to the benefits.
We are seeing transfers from the UK to a New Zealand-based qualifying recognised overseas pension schemes (QROPS), after which the member of the scheme instructs full encashment. From a New Zealand perspective encashment of retirement savings is not unusual. However, this is typically when the retirement savings have been built up by a New Zealand resident and taxpayer; they get to enjoy the retirement benefits associated with the legal infrastructure.
This is significantly different with a non-New Zealand resident. For example, an expatriate living in Spain instructs for the transfer of the UK pension scheme to a New Zealand QROPS scheme, and then instruct full encashment. The key difference here is that a non-New Zealand resident is benefiting in a way they would not normally be able to under a UK pension, and, as non-residents of New Zealand, they are not part of that country's tax.
Should a non-New Zealand resident be able to cash their scheme simply because they have chosen to transfer their pension to a New Zealand QROPS?
It is around this point that a lot of debate is taking place.
Firstly, there is a debate about the ethics of advising on the encashment of a UK scheme which itself is highly questionable when the member is not resident in New Zealand. This effectively takes assets which are protected in a structure such as a pension and places them into one's name.
By doing this you lose any kind of protection that the trust would have offered particularly against creditors or claims against your personal wealth at some future date. In addition, it brings wealth into the normal tax environment exposing interest earned or dividend income to income tax together with all capital growth to capital gains tax. Within a pension, income and capital gains are protected from taxation.
Inheritance tax or wealth taxes may also apply when the member passes away.
Our view is that anyone who undertakes this kind of aggressive approach to pensions is running the risk of incurring tax liability from HMRC. They could put themselves into a difficult situation in later years or become an unnecessary burden on the state.
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