A couple in their late 50s or early 60s look concerned as they read financial paperwork © Adobe Stock

UK financial consultants contacted The Mail on Sunday expressing their concerns about ‘misleading’ tax advice from the UK Government, which could result in British expats potentially losing ‘a huge chunk of their pension’.

According to The Mail on Sunday: “Many pensioners are already believed to be massively out of pocket after trusting the Department for Work and Pensions-sponsored Money Helper-Pension Wise guide”. Produced by the UK Government’s Money & Pensions Service, Money Helper offers free and impartial advice for various financial matters, including pensions. For about five years, its “Your Pension: Your Choices” guide has been widely distributed by pension companies to customers aged 55 (or about to be).

The guide stated that individuals could withdraw a quarter of their pension pot tax-free at age 55. However, it failed to mention that, although this rule applies in the UK, other countries, including Australia and New Zealand, do not recognise it. In other words, British expats could be taxed on this amount if they try to bring the funds into their overseas country of tax residence. Furthermore, they could potentially be taxed twice on the remaining 75 per cent by both the authorities in the UK and in their country of residence.

This is Money.co.uk‘s investigations editor, Tom Kelly, reports that only in the last few weeks and only after a “barrage of complaints from worried financial advisers” has the guide been updated to prompt Brits living or planning to live overseas “to seek regulated cross-border financial advice regarding your options”.

Mr Kelly explains that financial experts fear “a ‘ticking time bomb’ for many of the 1.2 million British pensioners living abroad and hundreds of thousands of others working overseas who followed the previous advice given and took the money in good faith.

“It means those who haven’t already received a tax bill from their new government could be about to be hit by one.”

Who received the Your Pension: Your Choices guide?

Primarily, the guide was (is) aimed at people with Defined Contributions (DC) pension schemes. Also known as money purchase schemes, these are now the UK’s most common type of occupational pension. An individual’s pension pot is based on contributions from them and their employer plus investment returns. You can gain access to that pension pot from age 55, and, as discussed above, in the UK, the first 25 per cent of this is tax-free.

How has the Department of Work and Pensions responded to these concerns?

In his article, Mr Kelly quoted a spokesperson from the Money & Pensions Service. “Your Pension: Your Choices is an important resource for pension savers planning to access their pension pot.

“However, our remit is to provide help and guidance, including making people aware of their general options and the risks associated with different choices for taking money out of a pension pot.

“Guides like this cannot be exhaustive or solely relied upon for complex financial decisions.

‘It can help people prepare, but they may need other resources to make the right decision for them, including a Pension Wise appointment and regulated financial advice or speaking to a pension provider.

“This guide also clearly states that before accessing their pension pot, people should read information from their provider, check for other conditions or charges and consult Money Helper, which includes detailed information on retiring abroad.”

How could the ’25 per cent tax-free’ rule impact British expats considering a pension transfer to New Zealand?

“To say that the potential tax implications of a pension transfer are complicated would be an understatement,” says GBPensions director Tony Chamberlain. “That’s why we work alongside professionals who have an exceptional understanding of the Double Taxation Agreement between the UK and New Zealand and how this factors into the QROPS (qualifying overseas pension scheme) rules.

“Invariably, these experts are not generalist accountants. This is a niche financial area warranting specialised advice.”

What role does Money Helper play in a UK to NZ pension transfer?

Some British expats wishing to transfer their pension must now have a telephone call with Money Helper before the UK pension scheme administrators will agree to transfer their funds. The phone call isn’t required in every case; there are numerous variables based on the individual’s circumstances and the scheme/s they’re wishing to transfer.

“The call with Money Helper is scheduled to take about an hour, and a record of the call is passed along to the UK scheme,” Tony explains. “They’re primarily trying to ensure that the client is making an informed decision of their own free will. In other words, they’re of sound mind and not being coerced by anyone – which is sensible, of course.

“However, since the service assumes they are a UK resident, a fair chunk of what’s being asked is irrelevant to our clients. Some of the questions are focused on the registration and regulatory credentials of the schemes and their administrators. All this information is contained within the paperwork associated with the transfer, such as the SOA (statement of advice), but we do provide a crib sheet for our clients, so they have all the details at their fingertips.”

Why it’s important to consider all your pension transfer options

Clearly, navigating the waters of cross-border financial transactions can be complex, which is why it’s crucial to understand all the choices – and their potential repercussions – before embarking on any kind of pension transfer.

GBPensions’ free booklet answers some of the questions we often hear and runs through a few transfer scenarios. You can download a copy here.

To read Tom Kelly’s article “Pensioners living abroad could lose thousands after ‘misleading’ Government advice”, go to ThisIsMoney.co.uk