A quick glance at a couple of expat forums in the US which proclaim some kind of expertise on QROPS transfers for those residing there makes for disturbing reading. If you are in a position where you think a QROPS may be the right option for you, but are unsure of exactly how beneficial it could be, take qualified advice. It really is that simple.
So disturbing were some of the ‘expert’ opinions from serial posters on the forums we took a look at, that we have been compelled to answer – in the simplest possible terms – some of the key questions relating to a US resident with a UK pension.
So without further ado, let’s take a look at some of the basics, with the answers provided by a group who know the industry and have conducted hundreds of transfers for satisfied clients within the US.
How do I know what type of pension I have in the UK?
In many cases, it will be an employer’s pension for which the majority of savers would be a bit shady on the finer points. You will usually have one of two types of pension if you have one provided by a former employer: a defined benefit scheme or a defined contribution. In some cases it will be a combination of the two.
When it comes to the value of defined contribution pension, it is largely dependent upon the performance of the fund. A defined benefit scheme value is calculated based on the number of years in service and the salary at the time of leaving.
You may on the other hand have contributed to a personal pension scheme which you took out yourself. In this case, as with a defined contribution scheme, the value depends upon the performance and growth of the fund investment.
Finding out the precise value of your UK pension or pensions can be an arduous task, a qualified adviser will usually be able to do this for you if you sign a consent form to allow them to access the information.
What is a QROPS exactly?
A Qualifying Recognised Overseas Pension Scheme. This type of scheme was introduced by HMRC in 2006 to enable the growing number of British expats to be closer to their retirement savings, and to allow them more control over the way in which their investments are run.
There are over 3,5000 schemes in operation across the globe, all with slightly differing benefits. The key advantages however, remain the same: Tax efficiency, Investment choices and choice of currency. Changes in UK pension legislation have – for now – meant that a few formerly key benefits of QROPS have been matched by the UK market (no requirement to purchase annuity, flexible access options etc…) but QROPS for those with multiple pensions or large sums within a UK scheme will find that the right scheme offers extensive advantages over what is currently on offer in the UK.
Can any type of pension be transferred into a QROPS?
For now, the answer is yes, however as has been well documented, as of April 2015 those with defined benefit schemes from the public sector will be prevented from moving their savings from the scheme they are already in.
This will come as a blow to anyone planning to move or retire abroad as the consideration of a QROPS as part of financial planning for expats is one of the first items on the financial planning checklist.
Can a UK pension be transferred into a US retirement plan (401k)?
The transfer of a UK scheme into the US is not permitted by the IRS.
Why not just leave my plan where it is and draw it out in America when the time comes?
There are a number of reasons why, if a transfer is possible, it should be looked into. The first thing to mention however, is that a QROPS will not be appropriate for everyone. If a pension pot sits at anything under the £50,000 mark, it is likely to be the case that when the calculations are made, the potential tax benefits and currency fluctuation avoidance – as well as the potential for self-investment – could be swallowed up by the charges associated with keeping a QROPS running.
For those with larger pensions, or numerous pensions, it is difficult to imagine a scenario where keeping the funds in the UK would be in the saver’s best interest.
Remember that when drawing a UK pension in the US, you will be subject to tax on the way out of the UK, tax on the way in to the US, and whatever the exchange rate happens to be at the time. If all three of these factors could be negated, a large percentage of US residents would take the option.
How can I make my pension work with IRS regulations?
Thousands of US residents with UK-based pensions have already completed their transfer into QROPS based in Malta. Fortunately the Maltese have in place a Double Taxation Agreement with the US which differs hugely from the DTA between the States and the UK.
QROPS providers invested an awful lot of money to bring a top US lawyer and one from the UK together to design a scheme which operates in a tax-efficient manner for the huge number of US residents with UK pensions. The result was that Malta was identified, and schemes designed specifically for this market.
To enable tax-efficient pension withdrawal as an expat residing in the US was once thought to be a pipedream, but as many can now testify, with the right advice and scheme, there are huge benefits to be found.
To Conclude…
Each circumstance requires tailored advice specific to the situation. Those in the US are fortunate that any advisor licenced to operate within the country must pass the Series 66 examination. This exam was introduced at the request of brokers and advisories throughout the States due to so many unregulated adviser’s giving the incorrect advice to clients.
While this advice is still around, it’s generally only found on forums. If you approach or are approached by a financial adviser in the States, ask what qualifications they have and ask to see them. Those that can show you, can be trusted to give you honest, impartial advice.