The UK government previously made several pension reforms. The pension freedoms (2015) gave over-55s more flexibility around withdrawals, and abolition of the Lifetime Allowance (2023) allowed for more contributions without tax penalties.
The unintended consequence is that pensions are increasingly being used as a vehicle for tax-free wealth transfer, rather than solely for retirement savings. Rather than rolling back the original reforms, the UK government has decided to close the loophole.
Previously, many UK pensions were not counted in your estate for IHT, particularly when benefits were paid at the discretion of pension trustees.
From April 2027, most unused pension funds will be included in the value of a person’s estate when calculating inheritance tax, which kicks in at 40% on estates worth more than £325,000 (around NZ$800,000 at today’s exchange rate).
The UK has also changed who gets caught by inheritance tax. Instead of being based on “domicile” (where you consider your permanent home), the rules now look at residence. If you've been a UK resident for 10 or more of the past 20 years, you're potentially liable.
One of the biggest pitfalls is also the effective double-tax. If you die aged 75 or older, your beneficiaries already pay income tax when they withdraw from your pension. Now they may also face the 40% inheritance tax first, creating an effective tax rate of up to 67%.
If you have a UK pension, it's time to assess whether these changes affect you. Consider whether transferring your pension to a New Zealand QROPS (Qualifying Recognised Overseas Pension Scheme) makes financial sense.
To understand your specific situation and whether a transfer would benefit you, seek independent advice. i-Select can introduce you to appropriate specialists and discuss whether a pension transfer may suit your situation. Please contact us for further information.
Disclaimer: This article is general information only. It is not financial, tax or legal advice, and should not be relied upon as a basis for making financial decisions. UK and NZ pension and tax rules are complex and subject to change. Whether you are affected will depend on your personal circumstances, including your UK residence history and the type of pension you hold. You should obtain professional advice from a qualified UK and/or New Zealand adviser before taking any action. I-Select Ltd is the issuer and manager of the i-Select PIE Superannuation Scheme and the i-Select Superannuation Scheme. Product Disclosure Statements for these schemes are available at i-Select.co.nz.