IRD is sending letters to taxpayers it suspects withdrew or transferred money from a foreign pension fund between 2000 and March 31, 2014, without paying adequate tax.

The person is then usually asked to include 15% of the lump sum in their tax return for the 2014 or 2015 year.

Since 2014, pension transfers have been taxable on a sliding scale. The longer someone is resident in New Zealand before they transfer their account, the more tax they pay. Within their first four years in the country, the transfer is tax-free.

But the tax exemption is removed if they apply for Working for Families, or take out a student loan.

Industry practitioners said the potential problem of how tax liabilities would be met was pointed out when tax changes were first mooted.

But IRD had indicated that people who transferred pensions could get around it because KiwiSaver schemes, which at that point had QROPS status, allowed people to withdraw money to meet their tax liabilities.

But last year all the country’s KiwiSaver schemes lost their QROPS status and can no longer accept British pension transfers without a hefty penalty charge of 55%. Those with money already transferred into the scheme cannot withdraw it for their tax bills.

From December this year, Financial Markets Conduct Act rule changes also reduce the amount that people can withdraw at age 55 from a non-KiwiSaver scheme that still has QROPS status to 10 per cent of their total balance.

Tax specialist Terry Baucher said: “It is a disgrace. The issues I have are many on this. It has a terribly compounding effect. More people are coming out of the woodwork because pressure is being applied.”

He said he had dealt with half a dozen cases of people struggling, one who owed more than $40,000 and did not have access to funds to pay it.

“People should be a lot angrier about this.”

He said tens of thousands of people could be affected and billions of dollars had been transferred.

Those who cannot pay the tax bill upfront can make an arrangement with the IRD to pay it off but pay a use of money interest charge of 9.21 per cent.

Alun Rees-Williams, of Britannia, said his firm had met with IRD to discuss possible solutions. That could mean turning the tax obligation in to a PIE tax or administrative charge that could be paid directly from the scheme.

Luke McKenzie, of MoveMyPension, said people who moved a pension now understood what was involved and would try to find other funds to cover the tax cost.

“Most people are warned before they transfer that they have some liability so they are prepared for it.”