Why Transfer a UK Pension to a Hong Kong QROPS?
Hong Kong QROPS pension schemes or ROPS (Recognised Overseas Pension Schemes) as they are now known are officially back on HMRC’s ROPS list. Hong Kong ROPS are fundamentally different from QROPS in Malta and Gibraltar and may be preferred in many circumstances for tax efficiency. Hong Kong ROPS are occupational, tax-recognised, registered and non-vested pension schemes. This makes them attractive investments for many countries due to the way they are perceived by foreign tax jurisdictions. Furthermore, the various Double Taxation Treaties tend to give the taxation rights to Hong Kong, which means in many instances, your pension benefits can be paid out tax-free.
The Hong Kong Occupational Retirement Schemes Ordinance (“ORSO”) came into force on 15th October 1993, and is the governing legislation for the regulation of voluntary occupational retirement schemes operating in or from Hong Kong. The ORSO aims to regulate the retirement schemes industry through a registration system to ensure that all voluntarily established ORSO schemes are properly administered and funded.
However, the UK government have now moved to tax QROPS in Hong Kong with the UK Finance Bill 2017. If you are not resident in Hong Kong for five full tax years after you have moved to Hong Kong, you will be hit with a 25% exit tax. You can read more about the new rules for Hong Kong QROPS here.
The rest of this post concerns Hong Kong QROPS in 2015 under the old rules. I am leaving this page here for prosperity.
Hong Kong QROPS Pension Benefits
- No tax in Hong Kong on sources derived from outside Hong Kong
- Access pension at age 55
- 25% tax-free lump sum allowed
- Further lump sums can be taken
- Full Pension Flexibility (same as the UK)
- Can invest in a wide range of investments
- Can invest in multiple currencies if desired
- Hong Kong has Double Taxation Agreements with 32 other countries – HK DTA list
- Avoids probate. Your pension gets apssed on to your named beneficiaries upon death as a lump sum or it can continue as a trust paying income.
Drawbacks of HK ROPS
- A member cannot direct assets as this is an occupational retirement scheme that is fully vested
- A member cannot make personal contributions to the scheme – only the employer can
In other words, this is not an offshore UK SIPP where you can buy and sell your own assets, this is a proper occupational retirement scheme where the trustees have a fiduciary responsibility to care for your pension and make sure that all financial investments are regulated. Please note the following restriction for members of a HK QROPS, a scheme registered with the Hong Kong Mandatory Provident Fund Schemes Authority as a Registered ORSO scheme (number R028832(1)) and registered with HMRC as QROPS (number QROPS5110002). Regardless of whether members have been non-UK tax resident for five full complete and consecutive UK tax years or less the maximum PCLS shall be 25% of the fund value at the time of calculation. ORSO schemes and MPF schemes are both retirement protection schemes set up for employees in Hong Kong.
List of Hong Kong DTA’s
Comprehensive Double Taxation Agreements in Hong Kong
Hong Kong QROPS Pension Transfer for US Residents
In the table above, you will notice the absence of a Double Taxation Agreement between Hong Kong and the USA. However, for people who have worked in the UK and want to move to become resident in the USA, a Hong Kong ROPS is a tax efficient solution. Why Transfer a UK Pension to a HK ROPS for US Residents? A transfer gets your pension out of the UK tax net The master trust 402 (b) is unvested and tax in the US is deferred until you draw an income You can transfer your pension into US Dollar or other currencies You have a choice of a wide range of benefits, but you cannot direct investments You cannot invest in residential property You can invest in a range of mutual funds or ETF’s The trustees must sign off on any investment decisions
The IRS and Hong Kong ROPS Pension Trusts
The IRS form i3520 states that under 402 (b),the HK ROPS is a foreign pension trust in the eyes of the USA. The difference between a Malta QROPS and the HK ROPS, is the Hong Kong pension scheme is an Occupational Pension Scheme (HK ORS) rather than a defined contribution scheme. It is unvested, so the tax is deferred in the US. The IRS knows what it wants a 402(b) pension to look like for inclusion in a DTA: it must be occupational, tax-recognised, registered and non-vested. If there is no company sponsor to sponsor the employee, it isn’t occupational. If a member can direct assets, it is vested. If a member can make personal payments into the scheme (rather than the contributions coming from the employer only) it is ineffective. This is the only IRS-recognised method by which US nationals may obtain a pension outside of the USA without creating a PFIC (Passive Foreign Investment Company).
Please contact us to find out more about Hong Kong ROPS / Pension Trust and estate planning today.