UNITED KINGDOM PENSION TRANSFERS

Wake-Up Call: Why New Zealanders with UK Pensions Should Act Before April 2027

The UK's pension inheritance tax shake-up will fundamentally change how British retirement savings are passed on within families – and time is running out to prepare.

Thousands of New Zealanders who previously worked in the UK and left behind pension schemes may be affected by changes taking effect in 2027. These changes could significantly impact the financial outcomes for their families. The UK government's decision to include unused pensions in the inheritance tax net marks the most substantial change to pension taxation in over a decade.

The End of an Era: Pensions Lose Their Tax Haven Status

UK pensions have long served as a strategic tool for inheritance planning. Unlike other assets, unused pension funds could be passed to beneficiaries free of inheritance tax, making them attractive for wealth preservation. This benefit has been particularly relevant for New Zealand residents who may not require immediate access to their UK pensions due to the strength of New Zealand’s own retirement system.

This favourable treatment ends on 6 April 2027.

From that date, unused pension funds will be treated like any other asset in an estate. If total UK assets – including property, investments, and pensions – exceed £325,000 (or £650,000 for couples), the excess will be subject to a 40% inheritance tax.

The Double Tax Trap: A Potential 67% Hit

For individuals who pass away after age 75, pension beneficiaries already face income tax on withdrawals at their marginal rate. With the addition of the new 40% inheritance tax, some families could face an effective tax rate of up to 67% on inherited UK pensions.

For example, a New Zealand family inheriting a £200,000 UK pension from a relative over 75 could face £134,000 in combined taxes, leaving just £66,000 of the original fund.

Why This Hits New Zealand Residents Particularly Hard

New Zealand residents with UK pension assets face several unique challenges:

• Distance: Managing UK financial affairs from abroad is complex, and these changes add further layers of compliance and decision-making.

• Currency and Tax Complexity: Inheritance tax calculations in GBP may conflict with estate planning conducted in NZD, introducing currency risk and compliance issues.

• Limited Local Expertise: Access to financial advisors with deep knowledge of UK pension and inheritance tax law may be limited in New Zealand.

• Timing Pressures: Many New Zealand-based pension holders may be unaware of the approaching deadline due to limited exposure to UK financial news.

The Government's Revenue Grab

The UK government estimates that 10,500 additional estates will become liable for inheritance tax, while 38,500 existing liable estates will pay more. This change is expected to generate significant revenue at a time of fiscal pressure.

Beyond revenue, the government cites fairness as a key motivation. Pensions, they argue, have increasingly been used as inheritance tax avoidance vehicles rather than for retirement funding. Including pensions in the inheritance tax net is intended to align them with other asset classes.

Action Plan: Four Critical Steps Before April 2027

1. Conduct a Complete Asset Audit
   All UK assets – pensions, property, investments, bank accounts – should be reviewed. Many New Zealanders underestimate their total UK estate value, particularly when property is included.

2. Review Pension Beneficiaries
   Pension schemes should have up-to-date beneficiary nominations. With the new rules, reconsidering nominations and proportions may be advisable, especially in light of beneficiaries’ tax positions.

3. Explore Early Withdrawal Strategies
   For those not relying on UK pensions for immediate living expenses, withdrawing funds early and investing in more tax-efficient vehicles may be beneficial. This is especially relevant for individuals approaching or over age 75.

4. Consider Cross-Border Tax Planning
   Transferring pension funds to New Zealand through approved schemes such as KiwiSaver may offer advantages. While international pension transfers are complex, the new UK inheritance tax regime may make consolidation more appealing.

The Annuity Renaissance: An Old Solution for a New Problem

These changes may renew interest in annuities – financial products that provide guaranteed lifetime income but are not passed on to heirs. With annuity rates at their highest since 2008, converting part of a pension to guaranteed income could remove those assets from inheritance tax scope while offering financial certainty.

For New Zealand residents, annuities may be particularly useful for hedging currency risk or funding UK-based expenses such as property maintenance or travel.

Don’t Let Distance Become Disadvantage

The greatest risk for New Zealand-based UK pension holders is inaction due to distance and complexity. While final rules may evolve, the broad framework is already in place. Early planning offers more flexibility and can help mitigate the impact on beneficiaries.

The UK pension landscape is undergoing a fundamental shift. Those who adapt their strategies now will be better positioned to minimise tax exposure. Delaying action until 2027 may result in limited options and increased financial burden.

Disclaimer: This information is for general purposes only and does not constitute personal financial advice. UK pension and inheritance tax rules are complex and subject to change. Professional advice tailored to individual circumstances is recommended.