Diana Clement: Advisers primed for incoming nest eggs

Superannuation funds and advisers must be salivating at the news that Kiwis with Australian superannuation will be allowed to bring the money back. But should they and others with superannuation pots overseas do it, is the question.

It's rare that you can simply cash in on a foreign pension fund when you leave the country. In the main locations where Kiwis work overseas - being Australia, the UK and US - there are strict rules around superannuation investments and the investments cannot be accessed in those countries until retirement age.

A significant number of returning Kiwis and British immigrants do transfer their pensions to New Zealand every year and no doubt large numbers will bring their Australian superannuation back once upcoming legislation is passed on both sides of the Tasman.

But in the case of the United States, it is nigh-on impossible to bring 401K retirement savings back to New Zealand. Grant Thornton tax associate Andy Crossen says one client worked out that he would lose 40 per cent of his 401K superannuation fund in penalties if he transferred it to New Zealand and that he would pay New Zealand tax on the remainder as well.

Expatriate Kiwis in Dubai are not entitled to invest in United Arab Emirates superannuation because only UAE nationals can join, getting generous benefits such as tax-free salaries and gratuities instead. South Africans can't transfer their superannuation here and those in the industry here see virtually no transfers from other countries.

There's good money in transferring UK pensions to New Zealand. That's if you're the company that carries out the transfer. The results of a generic search of the Herald's website for articles about "superannuation" came with plenty of ads from companies offering this service. There are pros and cons to repatriating UK pensions here. The pros are:

Your UK pension money, once transferred to some New Zealand superannuation schemes, can be withdrawn after six years.

Kiwis are not forced to buy annuity at retirement as they would be in the UK with 75 per cent of the pension pot.

New Zealand private superannuation is not taxed on receipt when it is paid out at retirement but UK pensions are.

A UK pension dies with you, whereas a New Zealand one can be willed to heirs.

Some of the cons, however, are:

If you do not transfer your pension into a Qualifying Recognised Overseas Pension Scheme (QROPS), you will have to pay a hefty penalty tax to the UK Government - of up to 55 per cent. You will also be charged this if you withdraw money from the NZ superannuation fund before six years have elapsed.

Some big fees are charged by the companies that offer to transfer your pension - usually up to 5 per cent of the value of the transfer - and there may be other fees charged by the NZ superannuation fund.

Growth of investments in New Zealand superannuation and KiwiSaver funds are taxed and often subject to high annual fees as well, which stifles the growth of your retirement fund.

There is also a real risk, says Crossen, of New Zealand tax being charged on UK pension transfers. Under the foreign investment fund rules (FIF) overseas pensions that cannot be accessed easily are often exempt from FIF taxation on the increase in value. But when the funds are brought into New Zealand, there could be tax on some or all of the gains of the fund over and above original contributions by you and your employer, Crossen says. Having said that, there is no case law so far.

The exception, says Joanne McCrae, tax partner at Deloitte, is under the transitional resident provisions, which apply to new migrants and some returning Kiwis who can bring assets back to New Zealand tax-free within a four-year period.

We don't yet know the fine details of how transtasman transfers will work. The devil will be in the detail. But to make it worthwhile for Kiwis to transfer the money we need:

Equivalent tax treatment.

Similar charging structures on funds.

Fee-free transfers at both ends.

It is likely that New Zealand superannuation funds won't accept Australian fund money direct unless the individual has taken appropriate advice. This will incur either a one-off cost to the investor or, as happens with the UK pension transfers, a percentage of the money as it goes into the fund is taken as commission and then annual trail fees paid to the adviser, which all eat into the growth.

Economies of scale and competition could in theory make it cheaper for investors transferring funds from Australia.

The problem is, says Stuart Scott, who runs pensionworks, a company that offers transfer advice, that most KiwiSaver providers don't pay up-front fees to advisers and on-going trail commissions, which could make it economically unviable for financial advisers to provide advice.

David Franks, head of KiwiSaver and superannuation at AXA New Zealand, says he would advise anyone transferring overseas superannuation to New Zealand to take financial and tax advice. With tax, in particular, everyone's situation is different and can change over time, says Franks. In the case of KiwiSaver, although AXA, a KiwiSaver default provider, wouldn't charge entry fees, advisers could charge clients an up-front fee.

Other issues that people wanting to transfer from Australia to New Zealand will have to consider are tax, retirement age, and fees/charges, which are mostly higher in New Zealand than Australia.

From a tax perspective it may make sense to leave funds in Australia taxed at 15 per cent, compared with 19.5 or 30 per cent in KiwiSaver. What's more, says McCrae, Australian superannuation funds can be accessed at age 60, compared to 65 for KiwiSaver.

There will certainly be many more Kiwis who have built up Australian superannuation than UK pensions. That in part is because the labour force is so transient between Australia and New Zealand and that superannuation is compulsory in Australia but not the UK. On the other hand a large percentage of the transfers to New Zealand are by British migrants, not Kiwis who have lived there.

Nonetheless Franks is expecting transfers from Australia to be significant once the legislation is in place - which could take a year.

That could be in part because decisions about pension transfers aren't just based on the numbers. One person who will be transferring her Australian superannuation is McCrae. She paid nearly $35,000 into her Australian superannuation while working there. "The reason I will is because it will be so much easier to manage it. I will have more control over it. In Australia it is out of sight and out of mind."

McCrae says that once Kiwis leave employment in Australia their funds are often transferred from an employer's scheme into a low-growth balanced fund and they find it difficult to manage the money from afar.

Another advantage, according to Finance Minister Bill English's office, is that where funds charge fixed fees as well as annual percentage management fees, consolidating savings will lead to a reduction in the amount of fixed fees payable.

One big difference between UK pension transfers and Australian ones is that Australian superannuation will have to be transferred to a KiwiSaver scheme. UK pensions must transfer to a QROPS scheme, most of which are not KiwiSaver schemes. The benefit of this is that depending on the rules of the New Zealand fund you choose, you may be able to withdraw your money much earlier than you could from a KiwiSaver.