New “Scheme Pays” QROPS Option for UK–NZ Pension Transfers

From 1 April 2026, people transferring a UK pension to a New Zealand QROPS will be able to access a new tax payment option known as “scheme pays”.  This change represents a significant shift in how overseas pension transfers are taxed in New Zealand and is expected to be particularly beneficial for individuals on higher marginal tax rates.  However, while the new rules offer welcome flexibility, they also highlight just how important it is to correctly understand New Zealand tax residency and the application of the foreign superannuation exemption period before any transfer takes place.

What is the new “scheme pays” option?

Under the new rules, individuals transferring a UK pension to a New Zealand QROPS may elect for the receiving scheme to pay the New Zealand tax directly to Inland Revenue on their behalf.  If this option is chosen:

• Tax is applied at a flat rate of 28%

• The tax is deducted from the taxable portion of the pension transfer

• The payment is made directly by the scheme, rather than the individual having to fund the tax personally

This option is voluntary, and existing methods of calculating and paying tax on pension transfers will remain available.  You can read more about the tax implications of overseas pensions here.  The introduction of “scheme pays” is particularly relevant for people who are taxed at 33% or 39% marginal rates, or where the transfer would push them into these higher marginal rates. This is generally the case where you are transferring large UK pension balances.  The new “scheme pays” option will be welcomed by those who would face cash-flow issues paying the tax personally, and those who want greater certainty at the time of transfer.  For some, the flat 28% rate will produce a materially better outcome than being taxed at marginal rates.  For others, particularly where exemptions or alternative calculation methods apply, it may not.

The real challenge: tax residency and the exemption period

One of the most common, and costly, mistakes we see is incorrect assumptions about New Zealand tax residency and the four‑year exemption period for foreign superannuation.  Many people believe the rules are simple. They are not.  Tax residency is not the same as “when you moved to New Zealand”.  This is a mistake we see all too often. New Zealand tax residency can begin far earlier than expected, and in some cases before physical relocation. Tax residency is extremely fact specific, and we have met clients who have come to us to discuss their pending New Zealand tax residency, only to determine they have been New Zealand tax residents for many years, often over 10 years. This can be because they have incorrectly calculated the day-count test, or they have misunderstood the permanent place of abode test.  Conversely, some people assume they became tax resident earlier than they actually did, shortening their exemption period unnecessarily.  The result is that two people who “moved to New Zealand” in the same year can have very different residency start dates for tax purposes.  You can read more about tax residency in this article and this article which discusses some common tax residency myths.

The foreign superannuation exemption period is often described as “four years”, but in practice it starts from the correct tax residency date, not arrival date. It runs for a fixed period of time as prescribed by law, which can be more or less than four years, and is not four tax years. The exemption period can be affected by prior New Zealand residency, even decades earlier or when you might not have wanted to “use” such an exemption. People spending time in New Zealand such as during a gap year, often misunderstand how the earlier period in New Zealand will impact them. It is also important to understand that the exemption period may not apply to all pensions or all parts of a pension.

We regularly see people assume they are exempt when the exemption has already expired - or assume it has expired when it has not.  Both errors can be extremely expensive. This places the schemes under a lot of pressure to ensure they have full information, and know how to correctly determine their client’s tax residency status and obligations. A lot of the information needed to make such a detailed tax determination is not generally held by the scheme.

Why does this matter?

The scheme pays option applies only to the taxable portion of the pension transfer.  That taxable portion is determined by:

• Whether the exemption period has ended;

• How long the individual has been New Zealand tax resident; and

• Which calculation method applies under the foreign superannuation rules.

If these inputs are wrong, the tax withheld by the scheme may be too high or too low, with limited ability to unwind the outcome later.

Scheme pays is not “set and forget”

Although scheme pays simplifies how tax is paid, it does not simplify how much tax is payable.  Key points to keep in mind are that the scheme pays option is elective.  It is not always the most tax‑efficient option though, and it does not remove the need to correctly determine residency and exemptions.  Once a transfer is completed, and/or the election is made, the tax outcome is generally irreversible.

The new scheme pays option is a welcome and sensible reform, but it does not remove the complexity of overseas pension taxation.  Before transferring a UK pension to a New Zealand QROPS (whether before or after 1 April 2026) it is critical to obtain specialist advice to:

• Confirm your New Zealand tax residency start date;

• Accurately determine whether any exemption period applies; and

• Compare scheme pays with the existing tax calculation options.

Overseas pension transfers can result in outcomes ranging from no New Zealand tax at all to taxation at the highest marginal rates.  The difference is often not the pension itself, but the planning and timing - obtaining advice will enable you to avoid unnecessary or irreversible tax costs. 

This article is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues please contact us.

This article was accurate at the time of publishing.