Australia is one of the world’s most multi-cultural countries, with one quarter of our population born overseas.
According to the AMP.NATSEM Income and Wealth Report, Calling Australia Home, the biggest percentage of migrants still come from mainly English speaking countries, with the largest number arriving from England (19 per cent) and New Zealand (9 per cent) under the skilled migration program.
When departing their country of origin, many of these skilled migrants may not only be leaving behind family and friends, but also their superannuation or pension accounts.
If a person has overseas super, it may be possible to transfer the funds into an Australian account, but it can be complex so it pays to get professional financial advice.
There are many tips and traps – such as hefty tax penalties – and different rules apply for each country.
It has been possible to move UK pensions to Australia for many years and with 1.2 million UK-born residents living here, these are the most commonly transferred funds. However, since 2006, in order to avoid hefty UK-based taxes, UK retirement savings must be transferred to a special kind of pension scheme called a Qualifying Recognised Overseas Pension Scheme (QROPS).
Using transfers from the UK as an example:
There are two main types of UK funds:
- The basic state pension which cannot be transferred to Australia; and
- Private pensions which can often be transferred to Australia. These pensions can include personal pension plans, stakeholder pension schemes and workplace pensions.
Advantages of transferring an overseas pension to Australia:
- Ease of administration – it’s far easier to control a super fund if it’s local.
- Greater flexibility – in the UK, retirees most often need to roll their super into a lifetime annuity, whereas in Australia they have the choice of taking their super as a lump sum or income stream.
- Tax benefits – there can be tax benefits in transferring funds from an overseas super account to Australia. For example, if a person keeps their UK pension overseas and receives an income stream while living in Australia, the income is taxed. But if the money is rolled into an Australian fund, the income stream may be tax-free.
- Social Security benefits – Australian super funds may be assessed more favourably by Centrelink under the income test. For example, if a person had $100,000 in an overseas pension and received an income stream of $15,000 per year, the entire payment would generally be assessed under the income test. However, if that $100,000 was transferred into an Australian fund paying a pension, depending on a member’s life expectancy, some of this income may be exempted. For example, for a 65 year old male, the first $5,400 (approximately) will be exempt under the income test, leaving only the remaining $9,600 to be assessed. This may allow the person to be eligible for a higher Age Pension.
Traps to watch out for when transferring overseas pensions:
- It’s only desirable for permanent residents – once a person has transferred an overseas pension to Australia, they are not able to transfer it back if they decide to move home.
- Consider the exchange rate – if the Aussie dollar is strong, as it is at the moment, a person may be better to wait until the dollar weakens, so they don’t lose out when the currency is converted.
- Will you gain more by leaving the money overseas? – some UK pensions have a guaranteed benefit component which may be paid on reaching retirement age, so it’s important for a person to weigh up how much they stand to lose if they transferred the money out of the fund before retirement age.
- Transferred funds are treated as a non-concessional contribution – when moving a pension to Australia, a person may pay a tax penalty if they go over the non-concessional cap.
- Beware the six month time limit – no Australian taxes are payable on the growth of the overseas fund after a person leaves their country of origin, as long as it’s transferred to an Australian fund within six months. After six months the growth is taxable.
- There is a five year reporting period – after transferring a UK pension to Australia, any payments from the fund will be reported back to the UK.
- Beware of exit fees – some funds charge processing fees for transferring overseas funds.
Another superannuation issue for migrants to consider is whether they have enough super for a comfortable retirement.
According to the AMP.NATSEM report, the average Australian born resident has a nest egg of $84,300, while their migrant counterparts have only $70,000.
So it’s important for Australia’s new residents to consider strategies to boost their super such as salary sacrificing, government co-contributions and spouse contributions.
Remember, a little planning now will help ensure a prosperous future.
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.
