Transferring a UK Pension to the USA
QROPS in the USA – When moving to the USA, most British expats should be aware that they cannot transfer their UK pension into a 401k or Roth IRA, but they can move their pension to a QROPS in Malta or Hong Kong or leave their pension in the UK.
Whilst HMRC allows pension transfers to the USA, the IRS won’t allow it, so you can keep your pension in the UK in GBP or transfer to USD in Hong Kong or Malta and have your pension paid directly into your local US bank account. This would then avoid UK taxes on death on your pension scheme.
If clients choose to leave their pension in the UK, they can move all their pensions to one place into a UK Self Invested Personal Pension (SIPP) which would be under UK tax rules or they can transfer to an HMRC-approved QROPS in Malta or Hong Kong and be outside the UK tax net. We are currently recommending Hong Kong for people considering being resident in the USA, you can read more about why to transfer to a HK ROPS for US residents here.
American expats returning to the USA should get in touch with us regarding the latest solutions. Every year, the rules in the UK & US changes and the landscape can switch quickly. You can lock in today’s solutions before April 6th, 2016.
“2015 was the last year to transfer public final salary pension schemes to a QROPS. There are also now more costs involved for transferring out private company final salary schemes to a QROPS. If you are moving to the USA, you should ask for a free pension transfer analysis from one of our technical team today”
Much has been written on QROPS in the USA as to whether a UK pension can be transferred to a 401k or Roth IRA. Whilst there are QROPS in the USA listed on HMRC’s QROPS list, the IRS will not allow the transfer.
So, what options are left? You could leave your pension in the UK where it is in your current scheme; you could transfer to a portfolio using a Self Invested Pension Plan (UK SIPP), but transfer your funds into USD; or the third option is to move your pension to an HMRC approved QROPS in Malta specifically designed with US residents in mind. Malta has a Double Taxation Agreement with the USA and a properly constructed QROPS set up in Malta avoids taxes in the UK and most of the taxes in the USA. In particular, it avoids tax on growth and upon death. You would pay income tax if you are drawing your pension in the USA at retirement.
<h2>HMRC Approved Malta QROPS with Master Trust for US Residents</h2>
FATCA (the Foreign Account Tax Compliant Act) kicks in starting 2014 and trustees must report information held by US persons with an aggregate value of over $50,000 during the year.
Financial institutions that don’t comply will be hit with a 30% withholding tax.
The QROPS trustees we use follow HMRC and IRS rules, so your QROPS won’t have a withholding tax. To be safe, the investments must also be US regulated investments with UK reporting status.
Should an American Expat Move Their Pension to a QROPS?
British expats, please skip this section and go down to “taxes on a QROPS in the USA”.
Americans who have returned to the United States and have built up a UK pension need to be very wary of how they deal with their UK pension or QROPS with regards to taxation.
Those who have previously moved to a Guernsey or Isle of Man QROPS under the old QROPS rules may find they have to pay taxes on their QROPS. Even though they may be in a tax-free QROPS scheme locked under the former QROPS rules, they still have to report their assets to the IRS every year. Ask your current QROPS provider for the latest IRS forms which need to be filled.
Under FATCA rules, this becomes even more important. Guernsey, Gibraltar and the Isle of Man do not have the necessary Double Taxation Agreements in place with the USA. Those who have not reported their QROPS to the US authorities will have to pay tax on any capital gains and income tax as well as fines for not reporting to the IRS every year. There have been some cases where Americans have had to pay taxes of up 25% or more for the transfer into a QROPS. That it is why it is so important to seek technical advice in this area. Currently, we are recommending transferring to an occupational retirement scheme in Hong Kong – a HK ORS which is set up as a ROPS (Recognised Overseas Pension Scheme).
How Do I Transfer to a QROPS as an American Expat?
For American expats returning to be US residents, they may be better off leaving in a UK SIPP or their current UK arrangements as the UK and US have a Double Taxation Treaty which extensively covers pensions and gives the taxing right to where they are resident.
A transfer to a Malta QROPS written with US residents in mind or to a Hong Kong ROPS result in a more tax efficient outcome. But, you need to seek advice from international tax attorneys to be sure. Malta has a Double Taxation Agreement with the USA, but the pension must be written under a master trust which understands the IRS rules. Otherwise, the QROPS could end up being a taxable event, unless the client has built up enough foreign tax credits to offset the possible taxation. You also need to report your offshore pension, the QROPS, to the IRS every year. So, you will need to liaise with your US accountant.
US authorities view QROPS as a form of trust, which therefore also necessitates “annual foreign trust reporting”. Failure to comply with this reporting requirement alone can result in tax penalties up to 50% of the account value.
For many individuals, a QROPS is an appropriate legal tax efficient trust which makes the most of an individual’s pension savings, but every client is in a slightly different situation and advisers need to take account of each individual’s circumstances, particularly in regards to where they will retire permanently.
What Tax Would I Pay on My QROPS in the USA?
Personal Income Tax Rates in the USA (from 2013)
Rate Single Filers Married Joint Filers Married Filing Separately Filing
10% $0 to $9.075 $0 to $18,150 $0 to $9,075
15% $9,075 to $36,900 $18,150 to $73,80 $9,075 to $36,900
25% $36,900 to $89,350 $73,800 to $148,850 $36,900 to $74,425
28% $89,350 to $186,350 $148,850 to $226,850 $74,425 to $113,425
33% $186,350 to $405,100 $226,850 to $405,100 $113,425 to $202,550
35% $405,100 to $406,750 $405,100 to $457,60 $202,550 to $228,800
39.6% $406,750+ $405,100 to $457,60+ $228,800
Head of Household Filing Status
10% $0 to $12,950
15% $12,950 to $49,400
25% $49,400 to $127,550
28% $127,550 to $206,600
33% $206,600 to $405,100
35% $405,100 to $432,200
The income tax rates in the USA can be quite complex, but basically you will be taxed at between 10% and 39.6% (if you are earning over $450,000 per year). Those at the top end now get whacked with a further 20% capital gains tax.
However, you can avoid most of these taxes through a transfer to a USA-approved QROPS in Malta
As a Qualifying Plan for US tax purposes, Members can claim treaty relief on realised income and gains generated within the Plan avoiding US income taxes. You also avoid UK and Maltese income taxes.
From age 55 the Member can withdraw their savings in the form of retirement benefits.
Withdrawals can be taken as an initial tax-free lump sum, of up to 25% of the total value of the Plan, and then ongoing lump sums can be made under the Maltese Programmed Withdrawals rules which allows large increases in the amount of pension you can take every 3 years. However, these treatments may be seen as capital by the IRS and taxed differently. Specifically, you can take half of any capital growth in the pot. This may be increasing soon due to the new UK rules allowing flexible drawdown.
Under Article 17, 1(b) of the US-Malta Double Taxation Treaty, the initial lump sum and programmed withdrawals will not be subject to either US Federal taxes or Maltese withholding taxes.
Lump sum payments, whether made as an initial lump sum payment or as ongoing Programmed Withdrawals, are franked against any untaxed income and gains realised in the funds.
Plan leaving the taxed “basis” of the Plan to be later drawn in the form of an income stream that will be free of Federal Taxes, as long as realised income and gains generated within the Plan have been distributed in the form of a lump sum or Programmed Withdrawal.
So, if you can take up to 25% of your pension as a cash lump sum at 55 or you can wait and let your pension pot grow, taking the fund at a later date. Further payments can be taken from your pension pot every 3 years. You can take up to 50% of any increase in the value of your pension pot after transfer.
QROPS in the USA Example
Here is an example of a QROPS in the USA.
John, 50 works for a big telecommunications company and has to move to the USA. He is unsure where he will retire, but knows it will not be in the UK.
He has paid into his pension for 15 years and has a $400,000 pension pot.
He moves his pension to a QROPS in Malta. It grows at 7% per year after fees.
At 55, his pension pot has grown to $561,020.69. He takes his tax-free lump sum of $168,306.21. The rest is left invested. After another 3 years, his pension has grown to $481,092.12. He can take 50% of the increase in value, which is $44,188.82. This continues on every 3 years or you could leave the entire amount invested to be passed on to your beneficiaries upon death.
The QROPS avoids any capital gains tax in the USA if you take your benefits this way and it also avoids any taxes in the UK and Malta.
The taxable amount would be any income he moved into the USA which would be taxed at the highest marginal rate of tax in the USA.
What happens if John leaves the USA?
If John retires back to the UK, your plan can be transferred back into a UK SIPP or left in a QROPS. In many cases, depending on the benefits you have drawn abroad, you may be able to avoid taxes on death in the UK altogether – please ask about our ‘returning to the UK’ brochure.
If John retires in Europe, Malta has a Double Taxation Agreement with most countries and your pension would likely be paid out gross with income tax taken in your country of residence. You would avoid US and UK taxation with no death tax.
What if John retires in Asia? Malta has over 65 Double Taxation Agreements and most likely, your pension will be paid gross in Malta with the relevant income taxes taken in your country of residence at retirement. If Malta does not have a DTA, your pension will have tax deducted in Malta and income tax is between 15% and 35%. You could also move your pension at that time to a QROPS in Gibraltar. The companies we deal with have operations in both districts and allows free transfers between the two.
A QROPS in Gibraltar has a flat rate of tax of 2.5%.
QROPS in the USA and Estate Tax. What Would Be the Taxes Upon Death?
What is the inheritance tax on a QROPS in the USA upon death? In the USA, tax upon death is on a member’s estate and known as an estate tax.
The US Approved Malta QROPS is regarded by the IRS as a Foreign Grantor Trust and the value of the plan forms part of the member’s estate for US Estate Tax upon death.
Luckily, the estate tax rate has been reduced from 55% to 40% from 2013 and the lifetime exclusion is adjusted to $5,340,000 for 2014, so many members will no pay no tax upon death unless you have property, assets and cash worth over $5,340,000. The annual gift tax exclusion is $14,000 for 2014.
Filing Your Tax Returns for a QROPS in the USA
If you have a QROPS in Malta and live in the USA, you need to file your yearly tax returns.
The US qualified QROPS is required to complete form 3520-A (‘Annual Information Return of a Foreign Trust with a US Owner’) on an annual basis. The QROPS trustees will make the relevant submissions on your behalf before the end of March each year. The QROPS trustees can provide you with an ‘Owner Statement’ in March each year which will enable you to complete your 3520 return and claim [tax] treaty relief.
Alongside form 3520, you also need to report your QROPS on your FBAR (‘Report of Foreign Bank and Financial Accounts’) return and form 8938. The QROPS trustees will provide you with the necessary information in this respect along with the owner statement.
It is crucial you file your tax returns EVERY YEAR. If you fail to fill in form 8938, the penalty can be as high as US$10,000 per incident on top of any late fees.
You can fill in your tax forms for free yourself via the IRS website or we can put you in touch with a qualified US tax attorney whose fees are very low.
What Can I Invest My QROPS in?
You can invest your QROPS in a range of mutual funds, ETF’s, hedge funds, bond funds and securities, but to be on the safe side, I would invest in SEC regulated products such as US mutual funds and Exchange Traded Funds (ETF’s). ETF’s are similar to index trackers and normally follow a basket of securities. For example SPY which tracks the price and yield performance of the S&P500 (the largest 500 companies in the USA).
“We use a system which actively manages your QROPS and has returned 9.25% per year annualized with low volatility/risk.”
The standard deviation is 12.10 (Apr 29th, 2014).
We can also target higher returns if you wish to take more risk.
But, you can choose the mutual funds or ETF’s you wish to hold if you like.
Your pension is transferred to a QROPS in Malta for tax & currency efficiency, your pension income and 25% tax-free cash lump sum is paid into your local bank account in the USA when you reach 55. You can also elect for your pension to be paid into an offshore account. It is your choice.
You can choose where to invest your hard earned pension monies. On top of being able to take an income earlier, avoiding UK taxes including the 45% tax upon death after 75, UK income taxes of between 20% – 45% and avoiding US capital gains tax of 20%, you will be in control of your pension.
Please ask us for our suggested strategy for a USD retirement portfolio and please ask us for a pension transfer value analysis. We can find the best value QROPS trustees for pension transfers to the USA.
Please send us your enquiries to email@example.com.QROPS in the USA 2016 by Richard Malpass