Should you Transfer your Pension Fund to Australia?
Relatively 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, can make the transfer of foreign pensions into superannuation attractive but this has not affected the fundamentals of any analysis about whether a transfer should be initiated.
Significant pension transfers should involve a detailed calculation comparing the merits of transferring the money to Australia with retention in the existing fund. This is a sometimes 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 should be carried out by a specialist financial planner - sometimes with the assistance of an Actuary.
Ideally, this analysis should be undertaken prior to your arrival back in Australia and again becoming a tax resident. There is a general belief that you have 6 month window in which to transfer a pension back into Australia and avoid any tax consequences, but this is only the case if your overseas pension fund qualifies as a "foreign superannuation fund" (FSF) for tax purposes. This is typically the situation with a UK pension transfer but not for the bulk of overseas pension funds, such as 401(k)'s, Canadian RRSP's and Singaporean CPF - and in these cases tax advice may be a critical determinant in whether you successfully initiate a transfer. Also, the physical transfer of pensions can prove complicated, so the earlier this process starts the better so as to meet any deadline.
Note that, currently, any after-tax contributions put into your Australian super fund ("non-concessional contributions") are normally subject to a limit of $100,000 per financial year or $300,000 averaged over three years (for under 65s) - with the result that some transfers may take a number of years to fully complete.
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 having your liabilities and assets in the same currency
- Greater local control and investment choice
- Greater flexibility in arranging death benefits to a 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 - particularly with defined benefit or final salary schemes. For example, the pension may be generously inflation adjusted; you may wish to maintain some sort of 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 401(k) plans, the taxation levied on early exit may be too high and the cash balances too small to justify a transfer.