Pension Transfers to Australia

Should you transfer a pension fund balance to Australia?

Recent superannuation changes in Australia, and specifically the fact that pension payments from a complying Australian super fund will generally be tax-free after the age of 60, have added to the attractions of transferring your pension into Australia but have not affected the fundamentals of any analysis.

The first requirement is a detailed calculation comparing the merits of transferring the money with retention in the existing fund.  This is a complicated analysis which compares the after tax cash flows, including any lump sum payments, expected from the existing fund with the cash flow paid from an Australian superannuation fund at retirement.  The assumptions used in such an analysis, including tax and inflation rates, exit and entry costs, earning rates and longevity are crucial and it needs to be carried out by a qualified Actuary.

Ideally, this analysis should be undertaken as soon as possible upon arrival in Australia, or in fact pre-date your arrival. The reason is simply that under Australian tax law you have 6 months to transfer your super funds to avoid taxation of any transfer. If you don’t transfer your pension within this period you will be required to pay tax on the incremental growth since you became resident.  The physical transfer of pensions can prove complicated, so the earlier this process starts the better so as to meet any deadline. From July 1, 2007, after-tax contributions put into your Australian super fund are to be subject to a limit of $150,000 per financial year or $450,000 averaged over three years (for under 65s). Up until June 30, 2007, after-tax contributions into your Australian super fund of up to $1 million can be made without penalty.

In assessing the desirability of a transfer you also need to consider a number of other benefits to transferring funds to Australia, including:

• More flexibility in Australia in the format of how benefits are accessed (eg. lump sum and income stream);
  
• Elimination of long term currency risk by matching your liabilities and assets in the same currency;
  
• Greater local control and investment choice;
  
• Greater flexibility in death benefits to the spouse.

What is the impact if you choose to leave a pension overseas rather than transfer it to Australia?  In normal circumstances, it means that the pension will be fully assessable in Australia and subject to normal levels of income tax.  While the lack of taxation in Australia under the new regimes has a significant impact on any comparative analysis, there may be situations where there is a benefit to leaving the pension fund in place.  For example, the pension may be generously inflation adjusted, you wish to maintain some sort on income in that currency or the cash value of the pension calculated by the Fund is considered inadequate.   Additionally, in some cases, and this includes a number of American 401K plans, the taxation levied on early exit may be too high and the cash balances too small to justify a transfer.

A final word should also be said about the applications of Australia’s Foreign Investment Fund (FIF) rules which are summarised in a separate section of the website.  There may be circumstances where pensions accumulated overseas – particularly personal pensions which have been popular in the UK, and American IRA’s – are subject to FIF rules and hence to potential taxation of unrealised capital gains. The FIF rules are an anachronism, but will figure in any analysis of whether funds should be transferred.

Additionally, we have devoted two separate pages to the particular issues surrounding the transfer of funds from the UK, particularly given the new QROPS regime, and to transfers out of American 401K’s and IRA’s. Over time we hope to extend this to include transfers from other countries such as Canada (RRSP's) and various parts of Europe.

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