QROPS in the USA. Transferring a UK Pension to a 401K
Much has been written on QROPS in the USA and 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 USD portfolio using a Self Invested Pension Plan (UK SIPP); or the third option is to move your pension to a QROPS in Malta. Malta has a Double Taxation Agreement with the USA and a properly constructed QROPS set up in Malta can avoid taxes in the UK and most of the taxes in the USA.
The Malta scheme must be a US qualified scheme and you should ask for the deed recognition letter from HMRC that the QROPS trustees should hold.
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.
What Tax Would I Pay on My QROPS in the USA?
Personal Income Tax Rates in the USA 2013
Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $8,925 $0 to $17,850 $0 to $12,750
15% $8,925 to $36,250 $17,850 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
35% $398,350 to $400,000 $398,350 to $450,000 $398,350 to $425,000
39.6% $400,000 and up $450,000 and up $425,000 and up
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 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 50 the Member can withdraw their savings in the form of retirement benefits.
Withdrawals can be taken as an initial lump sum, of up to 30% of the total value of the Plan, and then ongoing lump sums can be made under the Maltese Programmed Withdrawals rules.
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
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 take your pension in the form of a lump sum. Initially at 50 or when you wish after that at retirement as a 30% lump sum. Then further payments can be taken 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, 48 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.
He can take benefits once he has been outside the UK for 5 years. At 53, 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.
So, rather than paying taxes of between 10% and 39.6% in the USA, your pension is taken out in lump sums free from tax. You would also avoid any capital gains tax in the USA if you take your benefits this way.
What happens if John leaves the USA?
If John retires back to the UK, your plan can be transferred into a SIPP or left in a QROPS where it will follow SIPP rules. The time you have spent abroad will not face tax, only benefits drawn in the UK.
If John retires in Europe, Malta has a Double Taxation Agreement with most countries and your pension would be paid out gross with income tax taken in your country of residence.
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%.
If you are in one of these countries, there are other options and we can organize a transfer to a QROPS in another country such as Gibraltar where there is a flat rate of tax of 2.5% or New Zealand which carries no taxes, although the investment options are somewhat limited.
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 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 $5.12m, so many members will no pay no tax upon death unless you have property, assets and cash worth over $5.12m. The annual gift tax exclusion is $14,000 for 2013.
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 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).
Your QROPS will be transferred to Malta where you can avoid most US taxes and you have a much wider range of investments you can choose from to maximize your portfolio. On top of being able to take an income earlier, avoiding UK taxes including 55% tax upon death, UK income taxes of between 20% – 45%, avoiding US income taxes of up to 39.6% and capital gains tax of 20%, you would be able to take a higher income than would usually be allowed if under a UK pension.
Please ask us for our suggested USD retirement portfolio and historical performance.
Please send us your enquiries to firstname.lastname@example.org.