QROPS Tax Traps For American Pension Savers

Photo of author
Written By Saeed Maleki

Clearing up the Qualifying Recognised Overseas Pension Scheme (QROPS) problem for retirement savers in the USA is a thorny problem.

It turns out that QROPS are a one-way street for anyone with money tied up in a British pension moving to the US.

At the heart of the problem is the structure of a QROPS. Most are built around a master trust that appoints trustees to manage retirement funds for members.

Unfortunately, the US concept of a trust has a different legal grounding from the view from the UK.

And this makes a big difference into who can transfer their cash into a QROPS and who can’t.

US QROPS transfers

Definitely in are British expats settling in the US who transfer their onshore pensions to one of the countries that host QROPS.

For safety’s sake, the financial centre where the QROPS is based really ought to have a double taxation agreement with the US. The financial adviser will have to check this out as not all QROPS jurisdictions have such a treaty.

International workers moving to the US will have a problem if they are American.

US tax law treats the QROPS transfer in a similar way to HM Revenue and Customs unauthorised withdrawal rules, so a tax charge becomes payable.

International workers who are not American should have no problem, providing they follow the same advice path as British expats.

One advice firm has publicised the details of one QROPS transfer that went awry for an American couple.

Penalty pitfall

They transferred their UK pension rights of £1.2 million into a QROPS and were then walloped with a tax charge against the total transfer amount by the Internal Revenue Service (IRS)

The tax treaty issued worsened the situation as the couple needed to report annual fund growth as taxable income.

For American QROPS investors who do not realise this pitfall, when the Internal Revenue Service finds out, any back tax and penalties immediately fall due.

The best way forward for any retirement saver who wants to switch their British pension pots into a QROPS is to consult an adviser with a proven track record of dealing with US QROPS transfers.

The adviser needs to check tax residence of the investor and the tax treaty status between the QROPS host country and the USA.

Avoid financial advisers offering a US QROPS solution from a limited selection of providers.

The right approach is to customise the QROPS to the investor’s personal financial circumstances.

Getting the right advice

With all financial matters it is extremely important to take regulated financial advice from reputable companies. When it comes to transferring your UK pension we recommend contact the Qrops Group who will be able to explain all aspects and to help you transfer to a QROPS. They offer a free no obligation review of your pension to allow you to make the best decision.