A) The Australian Pension System
Australia has a three Pillar Pension System.
The first and public pillar, is composed of a means-tested, tax-financed Old Age Pension that provides basic benefits. It operates on a non-contributory basis and is financed by general tax revenues.
The second pillar forms the backbone of the Australian pension system. It is made up of funded individual pension accounts provided by Superannuation Funds.
The third pillar involves individuals contributing to their Superannuation Funds or to Retirement Savings Accounts (RSA).
B) Pillar 1: Australian State Pension
Australia has more regulations regarding the Old Age Pension then many other countries.
Eligibility & Payment Rates
1. Age Rules
To be eligible for Old Age Pension you must be 65 or older. Depending on your birthdate, from 1 July 2017 the pension age will be 65 years and 6 months. After that, the age will go up 6 months every 2 years until 1 July 2023.
2. Residence Rules
On the day you claim Old Age Pension you must be an Australian resident and be in Australia.
To get Old Age Pension you in general need to have been an Australian resident for at least 10 years in total. For at least 5 of these years, there must be no break in your residence.
3. Income Test
Your gross global income can reduce your pension.
They assess your income from all sources. This includes financial assets such as superannuation. Pensions have income and asset limits. If you’re over these limits, you receive a lower pension.
To give a general indication; if you are single/married, there will be no pension as of an annual global gross income of $ 23.798,-/ $ 36.437,-.
4. Assets Test
The value of the global assets you or your partner own or have an interest in, affects if you can get Old Age Pension and if so how much you can get. There are limits to how much your assets can be worth before it affects your pension amount.
The value of your assets is what you’d get if you sold them at market value. They’ll deduct any debt secured against the asset from its market value.
The value of your principal home is exempted if:
- it is on a single title;
- the land it’s on is not bigger then 2 hectares;
- it is not used mostly for business.
Leaving your principal home to go into care, may affect any State income support you get.
Regarding the possible impact of superannuations;
If you're under Old Age Pension age, your superannuation investments don't count in the income and assets tests. This is the same for your partner if they're under age pension age. Once you reach Old Age Pension age, your superannuation investments will count in the income and assets tests.
Most pensions and allowances have asset limits. They use these limits to work out if your assets will affect your payment rate. They calculate the payment rate under both the income and assets tests. The test that results in the lowest rate, or nil rate, will apply.
The following assets are being exempted:
- accommodation bonds paid on entry to a residential aged care facility;
- some income streams depending on when you purchased them;
- the not by you or your partner created life interest/reversionary interest/remainder interest/contingent interest;
- most compensation or insurance payments for loss or damage to buildings or personal items.
Finally there will be a decreased (or no) Old Age Pension to the extent that:
- you are single, a home owner and assets as of $ 253.750,-;
- likewise but not a home owner and as of $ 456.750,-;
- a couple is home owner and assets as of $ 380.500,-;
- likewise but not a home owner and as of $ 583.500,-.
5. Payment Rates
As mentioned they use income and assets tests to calculate how much Old Age Pension you receive.
The full amount in case of no decrease due to income/assets amounts to:
- for a single person annually $ 10.891,-;
- for a couple combined annually $ 16.418,-.
If you live in Australia and if you have concluded that you are entitled to State Old Age Pension, first set up a Centrelink online account through myGov to be able to claim online.
If you do not live in Australia, check international social security agreements about how to claim.
Information you need to hand over when you claim are your and your partner’s:
- income from work;
- other income;
- real estate assets;
- other assets;
- bank account name, number and BSB number;
- tax file number.
If you have lived outside of Australia, you also have to mention residence details:
- visa information;
- the date you and your partner became Australian citizens;
- the dates you and your partner lived in other countries.
Submit your claim in the 13 weeks before you reach Old Age Pension age to get Old Age Pension as soon as you’re old enough.
You may need to confirm your identity when you claim Old Age Pension. To confirm your identity you will need to visit a service centre and show your identity documents. If you've had your photo identification verified at a service centre, you can submit your remaining documents online using the Upload documents service.
After you have filled the claim, they’ll inform you:
- if they accept your claim;
- if so when they’ll start paying you;
- how much you’ll get.
If you’ve lived or worked outside Australia, they may ask you to apply for a pension from another country and inform them about the result. Your partner may need to do this as well, even if they don’t claim Old Age Pension.
Managing Payment Abroad
You can normally get Old Age Pension for the whole time you’re outside Australia, even if you live in another country for a while.
If you come back to live in Australia from another country and start getting Old Age Pension, your payment stops if you go overseas during the next 2 years.
This is also the rule if you got payments under a social security agreement with another country while you lived outside Australia.
If you leave Australia temporarily but stay an Australian resident, this normally counts as part of the 2 years.
If you go to a country they have a social security agreement with, you may still get Age Pension during the 2 years.
You need to tell them you’re leaving Australia if you:
- are going to live in another country;
- will be away for more than 6 weeks ;
- get payments under a social security agreement with another country;
- came back to live in Australia within the last 2 years and started getting Age Pension since then.
C) Pillar 2: Australian Occupational Pension System
Mandatory for Employees
Australia introduced compulsion in 1992.
Which had a good effect on the amount of participation of workers in Superannuation Fund as in 1974/1995 the percentage of participation amounted to 32% / 81%.
As of 1992 it made contribution into the Superannuation Fund system mandatory for all employees older than 17 and younger than 70 earning more than $ 450,- a month.
Superannuation Funds: DC
It is a Defined Contribution (DC) system that requires a minimum contribution to a Superannuation Fund. Until 1992 guaranteed Defined Benefit (DB) plans were more popular.
Australia has several different types of Superannuation Funds. For example Industry Wide Funds and Retail Funds. Which are offered to the public and to employers by financial service providers.
Employer contributions are subject to an annual maximum of $54.030,-. Employer contributions are tax-deductible up to certain limits.
The level of employer contributions has risen over the years, from 3% to 9,5% currently and will probably reach 12% by 2025.
Employees may make voluntary contributions. Employee contributions are matched by a factor of 1.5 additional up to $1.000,- per year by the government. This matching contribution is made for employees earning less than $ 58.980,-. Employee voluntary contributions are entitled to limited tax breaks.
Pension payments, too, are entitled to tax breaks, but these are under review.
In general employees have a choice over where their super is invested and do not have to stay with the fund chosen by their employer.
There are many comparison websites that allow investors to rate their super on a range of measures from charges and investments options to insurance and death cover.
Newspapers frequently publish league tables of the best-performing super funds, with the top 10 accounts achieving over 10 per cent, net of investment fees, in 2017.
However, even with this choice, many Australians will not easily shift their super out of the fund chosen by their employer. This due to their chief concern that it may be difficult to re-broke insurance or income protection attached to their super accounts.
Superannuation Funds and Costs Optimization
In particular, the fees paid by savers, which run into the tens of billions of dollars annually, are an area of persistent concern to policymakers and subject to fierce debate.
The area that has had a lot of criticism has been fees and whether funds have been operating as efficiently as they could.
One recent reform push required funds to offer a simple, low-cost default product called MySuper.
Fees for MySuper products are around 0.8%-1%. Critics argue that, across the board, many savers spend far more.
The average super fees in Australia are about 1% but there are huge variations across the industry, with consumers paying anywhere from 0.07% to over 2%.
While these differences might seem small, over a lifetime, your retirement savings could be tens of thousands of dollars worse off in a high-fee super fund.
Policymakers are paying attention. Fees are a critical area of inquiry for the Productivity Commission, an independent research and advisory body to the Australian government, which is midway through an analysis of competition in the superannuation market.
A combination of regulation and prevailing trends in asset allocation has put the brakes on further fee reductions. Australian pension funds are proponents of investing in so-called real assets, such as property and infrastructure projects. They generally offer good returns, but are capital intensive and thus expensive for investors in comparison with more typical pension fund holdings such as bonds.
Many say that the superannuation system has, in part, become a victim of its own success. With so many contributions pouring into the system, demand for money managers outstrips supply. The system has grown rapidly but economies of scale have not been delivered to members as strongly as they should have been.
D) Pillar 3: Australia Private Pension
The third pillar involves individuals contributing to their Superannuation Funds or to Retirement Savings Accounts (RSA’s).
An RSA is provided by banks, credit unions, building societies, life insurance companies as well as financial institutions which are RSA providers. It is similar to a super fund and utilized for retirement savings. They operate under the same tax rules as superannuation accounts.
RSA’s are capital guaranteed. Which means the interest and contributions to the account are only reduced by charges and fees. RSA’s are also fully portable so the account balance can be moved to a super provider or another RSA at your wish.
If you might want to compare RSA’s you can look at these aspects:
- Competitive interest rate: A higher rate of interest will help your retirement savings work harder. This is especially true if it's compounded daily. However even with a high interest rate on your retirement savings account, you'll likely earn better returns with a superannuation fund that is actively investing your balance.
- No fees: To ensure that every dollar you deposit helps you save for your retirement, you should look for an RSA that charges no account keeping fees and no annual fees.
- Account access: Your provider should provide online access.
Finally a critical aspect of RSA’s is that they are not that common anymore. RSA’s were introduced to help Australians save for retirement, before everyone had a superannuation account. These accounts are becoming increasingly more redundant as the superannuation system matures.
II] RSA TRANSFER
An RSA Transfer is the transfer of an RSA from one Pension Fund Administrator (PFA) to another, processed through the RSA Transfer System (RTS).
An RSA holder is only allowed to transfer his RSA once per year. An RSA Transfer is initiated by the RSA holder through the PFA to which his RSA is being transferred. It is based on the provision of the PRA 2014, which empowers the RSA holder to select and change the PFA that will manage his RSA.
The RTS is a computer based application deployed by the National Pension Commission for the purpose of initiating, processing and monitoring the RSA Transfer process.
The RSA transfer is free. No amount is charged by the receiving PFA to process the RSA transfer request from the RSA holder.
RSA transfer requests received are processed every quarter. However, only transfer requests received latest by the end of the second month of a transfer quarter are processed within that quarter. All transfer requests received within the third month of a quarter, will be processed in the next quarter.
Finally several often asked practical questions:
- Can a retiree on Programmed Withdrawal (PW) transfer his RSA? Yes, a retiree who is on PW is eligible to transfer his RSA from one PFA to another.
- Can a retiree on Annuity, transfer his pension funds from an Insurance Company to a PFA? No, a retiree on annuity cannot transfer his fund from an Insurance Company to a PFA. However, if the retiree is making voluntary contributions under the CPS, he can transfer that RSA from one PFA to another.
- Can a retiree on PW move to annuity while his RSA transfer request is undergoing processing? No, a retiree on PW cannot move to annuity while his RSA transfer request is undergoing processing. However, the retiree can only be allowed to transfer after 1 year with the new PFA.
- Can a Micro Pension Contributor transfer his RSA? Yes, he can transfer his RSA from one PFA to another.
- Can an employee of a State that has adopted the CPS transfer his RSA? Yes, however such employee can only transfer his RSA to any of the PFAs already appointed by the State Government to manage the RSA’s of its employees.
- Can an employer compel its employees to transfer their RSA’s to a particular PFA? No. The decision to transfer an RSA, similar to that of selecting a PFA in the first instance, is the exclusive preserve of the employee.
Can an RSA holder cancel an RSA transfer request after initiating the process? No, the RSA transfer request cannot be cancelled after its initiation.
E) UK Pensions transferred into Australian Pension Fund
In the past such a transfer was quite common even though there were issues about Australian Supers that did not comply with UK regulations.
However, the amendment of the UK law regime effectively closed transfers from UK pension funds into Australian pension funds.
Unless the Australian superannuation fund did not allow a payment of a pension before the member reaches age 55 (or retirement) on the grounds of ill-health as defined under UK law.
We have seen several advertorials about this issue and were somewhat surprized about its content.
We advise you to be cautious if you might think of implementing such a transfer.
F) Australian Oversight Occupational Pensions
The Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia.
APRA has prudential reporting standards, practice guides and other guidance and oversight relating to each kind of financial industry:
- Authorised deposit taking institutions;
- General Insurance;
- Life Insurance and friendly societies;
- Private health insurance;
APRA supervises Australia’s banks, building societies and credit unions (authorised deposit-taking institutions), life and general insurance and reinsurance companies, private health insurers, friendly societies and superannuation funds (excluding self-managed funds).
After an institution is licensed by APRA, it is subject to ongoing supervision to ensure it is managing risks and meeting prudential requirements and to identify those institutions that are unable or unwilling to do so.
The APRA Supervision Blueprint provides the strategic direction for APRA’s framework for prudential supervision. It is designed to ensure that APRA's supervisory methodologies, processes and tools are aligned with the objectives of APRA’s supervisory approach and support supervisors by providing an appropriate level of structure to guide them in the exercise of their professional judgement.
- authorised superannuation funds (other than self-managed superannuation funds);
- approved deposit funds;
- pooled superannuation trusts under the Superannuation Industry (Supervision) Act.
APRA has a Register of Trustees: A register of APRA-regulated Superannuation entities (RSE) and RSE licensees under the Superannuation Industry (Supervision) Act 1993.
Recently APRA has called for greater focus by superannuation licensees on administering outsourcing arrangements with related parties to effectively manage conflicts of interest.
G) Tax on Pensions
How much tax you pay on retirement income, depends on your age and the type of income.
I] National: Superannuation
For many people, an income stream from superannuation will be tax-free from age 60.
Types of Super Income
Income from a super can be an:
- Account Based Pension: a series of regular payments from your super money;
- Annuity: a fixed income for the rest of your life or a set period of time.
Part of your super money is taxable and made up of:
- Employer contributions;
- Salary sacrificed contributions;
- Personal contributions claimed as tax deductions.
Part is tax-free and made up of:
- After tax contributions;
- Government co-contributions.
If you're age 60 or over
Your entire benefit from a taxed super fund (which most funds are) is tax-free.
If you're age 55 to 59
Your income payment has two parts:
- Taxable: Taxed at your marginal tax rate less a 15% tax offset;
- Tax-free: You don't pay anything more.
If you're age 55 or younger
You can usually only access your super if you experience permanent incapacity. If this happens, you'll be taxed at the same level as people aged 55 to 59.
If accessing super for a different reason, such as severe financial hardship, your income payment has two parts:
- Taxable: Taxed at your marginal tax rate;
- Tax-free: You don't pay anything more.
Many Expats receive a pension pay-out from Australia or live in Australia and receive a pension pay-out from another country.
Australia has many Double Tax Treaties with other countries which try to prevent and or mitigate double taxation.
If you face double taxation and there is no such treaty, then you can only look for national regulations in order to prevent double taxation.
H) News February 2022
Australia’s $3.3 trillion Pension Pot Reaps Dividends With ESG
Responsible investing is paying dividends for Australia’s A$3.4 trillion (S$3.3 trillion) pension pot.Funds seen as sustainable leaders controlled 42% of the assets in the nation’s default savings plans last year, up from 28% in 2019, according to the Responsible Investment Association of Australasia (RIAA).
The 13 leading funds – which integrate environmental, social and governance (ESG) practices, are transparent and demonstrate a commitment to good governance and accountability – also outperformed rivals over three, five and seven years, the group said in a report on Thursday.
Australians “are moving their money to reap not only the benefits for society and the environment, but their retirement savings as well,” said RIAA chief executive Simon O’Connor. “Super funds that are doing responsible investment well are seeing their funds grow, leaving laggards at risk of losing market share.”
The shift comes as Australian workers become more concerned about how their retirement savings are invested, pressuring funds to adopt ESG practices and scrap investments in fossil fuel companies after deadly wildfires last year razed an area the size of England.
Funds are also acting after Retail Employees Superannuation Trust settled a lawsuit brought by a fund member over its approach to climate risk mitigation by committing to net zero emissions in its portfolio by 2050.
Australia Pensions: Supers Performance
The total size of Australia’s superannuation is staggering:
- The average super fund returned 15.2%, while the typical balanced fund grew by 13.8% in 2019.
- Those returns are the best since 2013.
- Analysts say lower interest rates, partly initiated by Donald Trump’s trade war with China, were a major factor in the growth.
The total pool of Australian superannuation has now hit $3 trillion and last year, at 15.2%, it produced the best return, on average, since 2013.
“Over a 15-year period we would typically expect funds to return 5, 6 maybe 7%, but we’ve had extraordinary results mainly driven by the outstanding performance of both international and domestic equities,”.
Figures from SuperRatings show the median, or typical, balanced fund produced a slightly lower return of 13.8% last year, but that was still the best in six years.
Australia’s financial markets were relatively small so, in an effort to stretch returns, local fund managers were investing more of their clients’ super in international markets, including the US.
The New 2019 Rules Of Superannuation
When you mention super, most people shake their head and mutter about the constant rule changes. Looking back over the past few years it’s a fair comment, with many significant changes occurring – and many more proposed but never legislated.
If you are wondering how those changes have affected your super and retirement plans, here’s a quick guide to the key changes and when they commenced.
Protecting Your Super reforms – starting 1 July 2019
The Protecting Your Super reform package was legislated to protect Australians’ super accounts from being eroded by insurance policy fees and premiums they may not require.
The key reforms are:
Insurance within inactive super accounts
Your super fund will be required to cancel the insurance cover that goes with your super account if your super account is deemed to be inactive. Under the legislation, super accounts are considered inactive if they have not received any contributions or rollovers for more than 13 months.
Super funds are required to inform fund members they are at risk of having their insurance cancelled and giving them the option to retain their insurance cover even if they are not making regular super contributions.
Closure of inactive super accounts
If you have an inactive super account with a balance of less than $6,000 it will be closed automatically and the balance transferred to the ATO, which will then use data matching technology to combine the low balance amount with one of your active super accounts.
Cap on fees for low balance accounts
Small super accounts with a balance of $6,000 or less at financial year-end will have their super fund fees capped at 3% per annum.
Switching funds without exit fees
Exit fees will be banned, allowing you to switch your super fund without having to pay any penalty or fee.
Other rule changes – starting 1 July 2019
Significant changes to the non-concessional (after-tax) contribution rules start on 1 July 2019, plus several changes to the threshold and payments for other super and pension areas:
No work test for contributions in first year of retirement
New retirees aged between 65 and 74 will now be able to make voluntary contributions into their super account without needing to satisfy the work test. To qualify you must have had less than $300,000 in your super account at the end of the previous financial year.
The relaxation of the work test rules only applies once and you cannot make contributions in subsequent financial years without meeting the work test. Under the new rules, after age 65 work test-free contributions are only permitted in the year immediately after the one in which you last met the work test.
Carry-forward concessional (before-tax) contributions start
From 1 July 2019, super fund members can make catch-up concessional contributions into their super account using their unused concessional contributions cap amounts from previous years.
To qualify, you must have a Total Super Balance of less than $500,000 on 30 June of the previous financial year and you must not have used all your $25,000 annual concessional contributions cap in the previous financial year.
Under the rules, you can carry-forward up to five years of unused concessional contributions caps for use in a later financial year, but the rolled forward amounts expire after five years.
The five-year carry-forward period started on 1 July 2018, meaning 2019/2020 is the first year in which you can make catch-up contributions. If you are aged 65 or over, the normal work test rules apply.
Rise in Age Pension Work Bonus
If you are receiving the Age Pension work bonus, you will get a lift in your work bonus payments from $250 to $300 per fortnight from 1 July 2019.
Pension Loans Scheme expanded
From 1 July 2019, the eligibility criteria and withdrawal amounts for the Pension Loans Scheme (PLS) will be expanded to make the scheme available to more Australians of age pension age.
Under the new eligibility rules, you must still qualify for one of the eligible pensions, but you can now have a payment rate of $0 for either of the Age Pension means tests (assets or income), or be receiving the maximum pension rate. The withdrawal amount per fortnight is increasing from 100% to 150% of the maximum fortnightly pension rate.
Lifetime annuity Means Test change
Changes to the Means Test for lifetime retirement income streams or annuities come into effect from 1 July 2019. Annuity payments are included in the Age Pension income test, but under the new rules only 60% of an annuity’s purchase price will be included in the assets test rather than the previous situation where the full purchase price is included. The assessment rate will reduce to 30% for people aged over 84.
End to anti-detriment deductions
Although anti-detriment payments were banned for any super fund member deaths from 1 July 2017, super funds could still make payments to eligible dependants for members dying prior to this date.
From 1 July 2019, no anti-detriment payment deductions are available, regardless of when the member died.
Age Pension age rises to 66
From 1 July 2019, the age at which you qualify for the Age Pension rises to 66, with the eligibility rising six months every two years until it reaches age 67 for everyone on 1 July 2023.
New Zealand Expat Pensions
A) The Pension System
The New Zealand pension system has three pillars:
- Pillar 1: The State Pension Superannuation (NZS).
- Pillar 2: The Occupational Superannuation Schemes and the KiwiSaver Scheme.
- Pillar 3: Private Pension Savings.
B) Pillar 1: State Pensions
New Zealand's public pension system is called the ‘New Zealand Superannuation’ (NZS). The pension is financed from general tax revenues.
The non contributory flat rate pension is paid to all residents fulfilling the ‘Residence Requirements’ at age 65. The beneficiary must have:
- Lived in New Zealand for at least 10 years since turning age 20.
- With at least five years spent in the country as of age 50.
- These requirements might change in the near future.
All benefits received under NZS are subject to income tax. The pension is paid regardless of whether the person is still employed or not. It is neither work nor income-tested.
New Zealand has not legislated for a compulsory retirement age and employers are not allowed to specify a mandatory retirement age in employment contracts. Which you do not see often in Western countries.
Early retirement is limited. The NZS does not provide benefits to those who retire before age 65. Those who leave the labour market before being eligible for NZS benefits, can apply for conditional, means-tested public income support.
The NZS amounts to indicative annually:
- For a single person living alone : $ 22.039,-
- For a single person sharing : $ 20.343,-
- Married person each : $ 16.953,-
If you might receive State Pensions from another government, that might reduce your NZS with that exact amount.
C) Pillar 2: Occupational Pensions
I. Occupational Superannuation Schemes
Occupational pensions are provided through Superannuation Schemes, either registered or unregistered, on a stand alone basis or as a part of a master trust.
The total number of registered Superannuation Schemes is decreasing. This is partly as stand-alone schemes are being transferred to multi employer arrangements in order to save administration and compliance costs through outsourcing.
It is intended that the KiwiSaver scheme will complement existing superannuation funds rather than replace them.
II. KiwiSaver Scheme
KiwiSaver is a voluntary work based savings scheme.
If you ‘opt in’, then a small amount of your salary is deducted every payday and put aside in a KiwiSaver investment scheme. Your employer has to contribute an amount equal to at least 3% of your gross wage.
KiwiSaver is for citizens or residents who are living in New Zealand. If you are working in New Zealand on a temporary work visa, you could tell your employer you want to ‘opt out’ of Kiwisaver.
KiwiSaver is also available for self employed people, although of course there are no employer contributions.
The capital that builds up is invested for you by approved ‘Kiwisaver Providers’ until you are eligible for NZS at age 65.
You can access the money earlier only in certain limited circumstances. For example if you become seriously ill or have financial hardship or if you are buying your first home.
The government website sorted.org.nz has information about KiwiSaver. It includes a KiwiSaver savings calculator, information on choosing a fund to invest your savings with and information on where to get more help.
B] How To Join
There are three ways to join KiwiSaver:
- Automatic enrolment when you start a new job.*
- Opting in through your employer.
- Opting in through a KiwiSaver provider.
* If you’re age 18 or over and start a new job, you’ll be automatically enrolled in KiwiSaver (with some exceptions).
C] Benefits Of KiwiSaver
- The government will give you $ 0,50 for each dollar you put in yourself up to $ 521,- each year. So make sure you invest at least per year $ 1.043,- in order to get the complete state contribution.
- If you are an employee and put in at least 3% of your wages per year, your employer has to match those 3%.
- As an employee, you can choose to contribute 3%, 4%, 6%, 8% or 10% of your gross wages.
- Once you have joined, you can make voluntary contributions being Lump Sums or regular payments at any time.
- If you switch jobs, your KiwiSaver account moves with you.
- If you buy your first home or have financial hardship, access to the funds is possible.
- Most people will use the KiwiSaver for retirement and in that respect do not forget that the capital can i.e. only be used as of age 65.
E] Choosing The KiwiSaver Provider
- You can only have one provider.
- Banks and investment companies are providers.
- You can choose your own provider or join your employer’s provider.
- Make sure that there is a fine 24/7 portal access, the costs are low, you invest according to your personal risk profile and that there are many funds to choose from.
- You can have more than one account but that will not get you any extra benefits and probably higher costs.
- You can use this link to compare providers:
For more information you can visit the following links:
D) Pillar 3: Private Pensions
This regards private savings and investments.
It does not include any additional private pension plans with interesting tax benefits as you might see in other countries. But New Zealand already has the KiwiSaver Plan as extra pension plan with extra benefits.
E) The Retirement Age
New Zealand does not really have an official retirement age. Furthermore it is forbidden to stipulate in employee contracts that the employee has to leave as of a certain age.
Nevertheless many people aim to retire when they are age 65 as that is the age when most superannuation plans, including the Government-funded New Zealand Superannuation begin to pay out your savings.
F) Oversight On Pensions
In New Zealand the oversight on pensions is being provided by the FMA: The Financial Markets Authority.
For more information: https://www.fma.govt.nz/about-us/who-we-regulate/
G) Pension Pay-out Flexibility
- The Pillar 1 State pension pays out as of age 65 as an annuity.
- The Pillar 2 KiwiSaver has a flexible pay out as of age 65. If so desired, it can be taken as a Lump Sum.
- The Pillar 2 non KiwiSaver occupational pension plans regulate their own pay out so you will have to check their product details.
H) Pensions & Tax
I. Tax On KiwiSaver
Your KiwiSaver scheme invests your contributions so they earn money for you. You pay tax on the money your investment earns. Withdrawals from your KiwiSaver scheme are therefore ‘tax free’.
For the right tax rate you need to know what kind of KiwiSaver scheme you're in:
- Widely held Superannuation Schemes or
- Portfolio Investment Entities (PIE’s).
Your provider's product disclosure statement tells you which type of scheme you're in. Your My KiwiSaver account has the name and contact details of your provider.
If your KiwiSaver scheme is a Superannuation Fund, your investment earnings are taxed at 28%.
All the KiwiSaver default schemes are PIE’s. They invests in different types of funds.
Your scheme provider taxes your investment earnings using the Prescribed Investor Rate (PIR) you choose. A PIR is a tax rate. It's based on your total taxable income in the last two income years.
If you're enrolling into KiwiSaver for the first time the tax authority may let you and your scheme provider know what they think your PIR should be. They base this on the income information they have in your myIR account.
You can work out your PIR in myIR: Inland Revenue - Te Tari Taake, New Zealand (ird.govt.nz)
II. Income Tax Rates
The 2021 rate for persons who are married and file separately:
Tax Rate Taxable Income Bracket
- 10% $ 0,- to $ 9.950,-
- 12% $ 9.951,- to $ 40.525,-
- 22% $ 40.526,- to $ 86.375,-
- 24% $ 86.376,- to $ 164.925,-
- 32% $ 164.926,- to $ 209.425,-
- 35% $ 209.426,- to $ 314.150,-
- 37% $ 314.151,- and more
I) International Pensions
I. State Pensions
A] If you are entitled to New Zealand State Pensions and live elsewhere, it is possible that you will still receive this full pension.
B] If you live in New Zealand and receive a State Pension from another country, it is possible that to that extent your New Zealand State Pension will be reduced.
II. Occupational Pensions
If you have pension claims in another country and would like to retire in New Zealand, then it might be an option to transfer those claims to New Zealand.
Pensions in countries like the UK, Australia and South Africa may be transferable to New Zealand. Navigating the New Zealand tax rules and the rules of overseas pension providers is complex. You can start by checking the Inland Revenue’s website.
Regarding all international pension pay out you have to check if there are double tax treaties in order to prevent or mitigate double taxation in both the residential country and at source.
IV. UK Pension Claim & QROPS
If you are as of age 55 and have a UK Occupational Pension Claim and you now live and prefer to retire in New Zealand, then it is possible to transfer your UK claim into a New Zealand QROPS. Which stands for ‘Qualifying Recognised Overseas Pension Scheme.’
The idea of such a move is to transfer the claim out of the UK without any UK tax exposure at the moment of the transfer. Which would only be possible if you would transfer to a HMRC recognised QROPS pension product.
B] UK Tax
As of March 2017, some transfers to and from a QROPS may incur a 25% UK tax charge called the ‘Overseas Transfer Charge’. In certain other circumstances there can also be a UK tax exposure later on.
C] New Zealand Tax
A] The transfer: New Zealand tax is not generally payable if your UK pension funds are transferred to New Zealand within the first four years of you becoming a New Zealand tax resident.
However, if transferred after four years of you becoming a New Zealand tax resident, then the transfer may be subject to New Zealand tax.
The amount of New Zealand tax payable is dependent on the calculation method used. You can find more information on calculating your New Zealand tax payable on withdrawals from a foreign superannuation scheme by visiting the IRD website.
B] Annual income: Once the transfer is complete, New Zealand tax is payable on the income from your investment under the ‘Portfolio Investment Entity’ (PIE) tax rules.
If you check HMRC’s list for allowed New Zealand QROPS, then you will find them all.
Mind you, a KiwiSaver is never a New Zealand QROPS.
E] Be Critical
Expats are often approached by providers that state that a QROPS is ‘perfect’. Such a switch is complex and should only be implemented if you have all the required information.
If a switch to a QROPS might be positive for you depends i.e. on the following aspects:
- What is the UK tax exposure the moment of the transfer or later on?
- What is the New Zealand tax exposure the moment of the transfer and later on?
- What is the cost level and is it not too high?
- Is your pension capital high enough related to the high additional costs?
- Does the QROPS offer at least equal investment options as the current plan?
J) Retirement Visas
Temporary Retirement Visitor Visa
If you have NZ $ 750.000,- to invest in New Zealand for 2 years plus an additional NZ $ 500.000,- to support yourself plus an annual income of NZ $ 60.000,- then you can stay longer in New Zealand than allowed on a standard visitor visa.
If they approve your application in principle, you will have 3 months time to transfer your funds to New Zealand.
K) News February 2022
New Zealand pension system drops in world rankings
New Zealand's retirement income system has slipped in world rankings, with calls for reform to close the pension gap for women.
The annual Mercer CFA Institute Global Pension Index places New Zealand at 15th, down from 10th place last year.
Mercer said the index was a comprehensive study of global pension systems, accounting for almost two-thirds of the world's population.
It benchmarked 43 retirement income systems around the world, highlighting shortcomings and suggesting improvements.
New Zealand's pension system received a B grade, Mercer said.
Mercer senior partner and lead author of the study Dr David Knox said the gender pension gap was not an issue unique to New Zealand.
"The principle reason for this is the employment of women - obviously we're talking averages - the number of years they spend in the workforce is less, because they often enter the workforce a little bit later due to more education," Knox said.
"They retire earlier [on average compared to men] and spend time out of the workforce caring."
Governments needed to think about ways to eliminate the pension gap, Knox said.
"One example is pension carers credits, so if you're caring for a young child, you still get some credit for your pension accumulation account."
The top performing countries had a key difference when compared to New Zealand, he said.
"New Zealand has good coverage with KiwiSaver, about 80 percent of the working age population has a pension or superannuation account.
"The top three countries are all in the high 80s, around the 88 percent mark. They broadened their systems to include even more people."
The top three systems in the Global Pension Index were Iceland, the Netherlands and Denmark.
Warning Of Retirement Villages: 'Financial Sting'
Consumer NZ wants an overhaul of retirement village regulations to protect residents from unfair terms.
Consumer NZ chief executive Jon Duffy said its review of retirement village contracts found terms that unfairly favour the village and risk leaving residents out of pocket.
Their call follows the Commission for Financial Capability publishing a white paper calling for a full review of the sector. The commission has sent it to Housing Minister Poto Williams.
The commission provides financial education and information to New Zealanders and advises the Government on retirement income policy,“Retirement villages promise the good life in your golden years. However, the agreements consumers must sign before they move into a village can have a nasty financial sting. Some also risk breaching consumer law,” Duffy said.