UK Pension Transfers to the USA
QROPS USA – Both British expats and Americans who have worked in the UK can transfer their UK pension offshore to a US-approved QROPS in Malta or a QROPS in Hong Kong to avoid UK taxation. But, we recommend you move your pension out of the UK tax net to a QROPS before you move to the USA to avoid a tax trigger from the IRS.
It is the taxation by the US Inland Revenue Service (IRS) which makes the transfer more complex from a tax viewpoint. The UK and the USA already has a solid Double Taxation Agreement which means that your UK pension can be paid into a US bank account and taxed in the USA rather than the UK. But, the main issues are the currency and the tax on death in the UK.
Under current rules in 2016, if you leave your pension in the UK, your pension would face a 45% tax on any lump sum left to beneficiaries. A UK pension transfer to a QROPS in Malta or Hong Kong would escape the UK tax on death.
If you are transferring to a QROPS in Malta, there may be some issues involved with the taxation of the trust where the underlying investments get taxed as a Passive Foreign Investment Company (PFIC). Also, if you are already resident in the USA, there may be some cross border taxation issues where the IRS may be entitled to tax your pension if you transfer AFTER becoming a US resident. You can read more about the cross border issues here in the Malta US IRS letter here.
But, here is the main paragraph concerning cross border payments.
“U.S. citizens and lawful permanent residents (“green card holders”) are generally subject to U.S. income tax on their worldwide income without regard to where they reside. If a U.S. citizen or green card holder is a resident of the United States under the residence article of either the U.K. Treaty or the Malta Treaty, as the case may be, at the time of a transfer from one pension scheme to another pension scheme, then the rules described above apply. If, however, the U.S. citizen or green card holder is not a resident of the United States under the residence article of the applicable treaty at the time of the transfer, then Article 18 of the Malta Treaty or Article 18(1) of the U.K. Treaty would not apply.“
So, if you are thinking of retiring in the US, you need to transfer your pension offshore to Malta or Hong Kong before you move.
UK Pension Transfer to a Malta ROPS for US Residents
Why Malta? Malta has a Double Taxation Treaty with the USA, so you can get your pension out of the United Kingdom into somewhere where your pension will grow tax-free, avoid the UK tax on death and go into gross roll-up delaying income tax until you draw income in the US at pension age.
Even though HMRC allow pension transfers to the USA, the IRS will not allow it, so if you want to move your pension offshore into USD, you can move it either to Hong Kong or Malta. Let’s discuss Malta first.
There is a wealth of information on the internet concerning UK pension transfers to a QROPS USA, which may be confusing to Brits living in the U.S. If you have recently moved to the USA and are working over there, you have to pay US tax on your worldwide income if you are a US resident. If you are there for less than 183 days, you only need to pay tax on income derived from working in the USA.
We help British expats considering moving to the USA figure out what to do with their UK pensions. Is it better to leave them in the UK or transfer them offshore for tax purposes?
There have been a number of changes in the budget in 2015 and you should make yourself aware of the new tax changes. You can read our recent article here on the effect of the 2015 UK budget on QROPS. There will likely be more changes again on April 6th, so you need to be quick to lock in under current tax rules as every year more of these tax loops seem to close and they get “grandfathered” in under current rules.
“You cannot transfer a UK pension to a 401k as the IRS will not allow it”
“However, you can transfer your pension to a tax efficient jurisdiction in Malta or Hong Kong and have your pension funds paid into your local US bank account”
This will avoid the death tax in the UK of up to 45% after 75 yrs old and UK income taxes of up to 45%. If properly structured, there is no tax in Malta on growth or death as Malta has a Double Taxation Agreement with the United States. You would just pay US income tax on your pension when you decide to draw an income at retirement age after 55.
We can help transfer your UK pension to an investment portfolio which you can access online from the States. Your pension is first transferred in cash from your existing scheme to a Qualifying Recognized Overseas Pension Scheme (QROPS) in Malta or Hong Kong.
This gets your pension out of the UK tax net. The funds are then invested in a portfolio wrapper in the Isle of Man where you can then buy US regulated mutual funds or US regulated ETF’s that you want or you can hold it in cash or US regulated bond funds. If you are moving your pension out of the UK, you would need to transfer your pension into US Dollars. If you want to keep it in GBP, we recommend keeping your pension in the UK in a SIPP or under your current arrangement. However, your pension would face a higher tax on death.
A UK Pension Transfer to Hong Kong ROPS for US Residents
A safer option? We are now of the opinion that a pension transfer to Hong Kong may be more appropriate than transfers to Malta.
You need to seek international tax attorneys for full clarity and tax rules may change, but this is the opinion of the trustees. You cannot transfer a UK pension to the USA. Even though HMRC allows a transfer, the IRS won’t recognise it or allow it.
A transfer to a Hong Kong ROPS pension scheme may be a suitable solution and we think is a better solution than moving to Malta. Both have a Double Taxation Agreement (DTA) with the USA, but they are seen differently by the IRS. We believe a Hong Kong ROPS is a more secure solution.
Because a HK ROPS is a 402 (b) trust, an HK ROPS is a foreign recognised occupational pension trust in the eyes of the USA. This means the trustees are exempt from filling in form i3520 for the IRS. See the section “Exceptions To Filing”.
There is also an exemption to filing form 8621. This is due to “a U.S. person that is considered (under sections 671 through 679) the shareholder of PFIC stock held in trust”, i.e. under the HK 402 (b) trust.
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 pension to look like for inclusion in a DTA: it must be occupational, tax-recognised, registered and non-vested, i.e a 402 (b) pension trust. 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.
We believe 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).
To be safer, we then instruct the PFIC to hold Vanguard or Fidelity “in U.S. registered funds with UK “reporting fund” status” – that would then tick all the IRS and HMRC boxes.
QROPS USA Video – Transferring Your Pension to a 401k is Not Possible
Once your pension is transferred you avoid any taxes in the UK and Malta. You just pay US taxes on your pension income at retirement.
You can read more on income taxes in the USA for a QROPS in the USA here.
Firstly, some tax tips for British expats emigrating to the USA.
Tax Tips for British Expatriates in the USA
- Remember to file your tax returns, otherwise you can get with a 25% penalty just for filing late.
- Fill in a P85 form to inform HMRC that you have left the UK. This supports your claim of being non-resident in the UK and avoids you having to pay UK income tax. You may also be entitled to a tax rebate.
- Fill in form NRL1 if you are letting a property. This allows your letting agent to pay your rent income gross.
- File using the correct filing method. You can employ a US accountant to do this for you for about $300.
- In the U.S., YOU are expected to figure out what your withholding’s should be and then file a “W-4” form with your employer to tell them what to withhold. If you have too little tax withheld during the year, you’ll have an unexpected tax bill at the end of the year, and you might be liable for underpayment penalties. If you have too much withheld, you give Uncle Sam an interest free loan until you file your US tax return and claim a refund!
- Fight US Audits. the IRS knows that British Expats need to be up to date on their taxes in order to qualify for potential Green Cards and US Citizenship.The IRS also knows that British Expats will often just pay the amount that the IRS claims they owe instead of fighting it because they aren’t familiar with the tax system, and they don’t want to jeopardize any future immigration benefits.
- Resident Aliens: If you have a green card or you have been physically present in the United States on at least 31 days during the current year, and 183 days during the 3 year period that includes the current year and the 2 years immediately before. Otherwise you are considered a non-resident alien. To satisfy the 183 days requirement, count all of the days you were present in the current year, and one-third of the days you were present in the first year before the current year, and one-sixth of the days you were present in the second year before the current year.
- Non-resident aliens fill in Form 1040NR (PDF) or Form 1040NR-EZ (PDF). You pay tax on any income from work, business or trade in the U.S.
- If you are a resident alien, you must follow the same tax laws as U.S. citizens. You are taxed on income from all sources, both within and outside the United States. US Single or Joint Tax Returns for British Expats with No Dependents. Form 1040ez. US Individual Tax Return for UK Expats. Form 1040a. US Individual Tax Return for UK Expats. Form 1040
- Ask for a free pension transfer analysis and see if a UK pension transfer to a QROPS in Malta would improve your tax situation.
Tax Relief on a UK State Pension in the USA
Q. Do I get a full state pension in the USA as a UK domicile resident in the USA?
A. Yes, the UK and USA have a double taxation agreement and an agreement to pay out an index-linked full pension. Your UK pension can be paid straight into your local bank account in the USA.
In order to claim tax relief on your UK state pension, you will need to fill out the HMRC US Individual form as well as the IRS Form 8802 and send it together with the $85 fee to your local IRS office in the US.
It is possible to receive both a UK and a US pension if you have made regular payments to both, however you may then have to pay the US Windfall Elimination Provisions. To discover if your payments could be reduced, you should write to the US or UK social security offices.
Can You Transfer a UK Pension to a 401k in the USA?
QROPS USA transfers were made available in principle to US nationals who had worked in the UK and British expatriates who were considering moving to the US since 2006. In fact, you can still find a list of companies on the Inland Revenue’s web site allowing UK pension transfers to US 401k pension schemes.
However, the Inland Revenue Service (IRS) essentially blocked the move, refusing to recognize QROPS transfers into a QROPS USA by British expats living there on the grounds that the QROPS trust structure is not legal in the USA.
“UK pension transfers to 401k schemes were blocked by the IRS (US tax authorities).
Similarly, US nationals living overseas cannot transfer from a 401k to a QROPS.
Attempts to transfer QROPS to the US were either indefinitely stalled, blocked or attracted IRS tax penalties on any funds transferred.
Unfortunately, the situation will likely worsen with the advent of the The HIRE act which comes into force in the USA on 1st January, 2013. Part of the regulation changes include The Foreign Account Tax Compliance Act (FATCA) which will essentially bar all US residents and US nationals from transferring their pensions into a QROPS in the USA.
Although this complicates any UK pension transfers into a 401k pension scheme, some providers have restructured the master trust that manages a QROPS into a USA-friendly legal entity in countries outside the USA.
So, what are the options?
UK Pension Transfer to a QROPS in Malta for British Expats in the USA
British expats cannot transfer their pensions to a 401k. Even though HMRC allow it, the IRS will not permit the transfer.
The solution is to transfer your UK pension to a QROPS in Malta which has a Double Taxation Agreement in place with the USA meaning your QROPS would grow tax free and avoid the 55% tax upon death in the UK.
The framework is now in place for a QROPS USA pension transfer via Malta and for those with larger final salary pensions, we offer a free pension transfer analysis. For those that need insurance, we can also obtain a signed letter from a lawyer explaining the Double Taxation Agreement between the USA and Malta.
Be careful when choosing the correct QROPS structure as the trust needs to be a US approved Maltese trust. A normal QROPS in Malta is not sufficient. Only a handful of companies offer this trust.
For British expats working in the USA, you could benefit from a QROPS in Malta to avoid UK taxation. This helps you avoid up to 55% tax upon death although you would pay US income taxes on the income if you were to draw it in the USA.
Malta has a Double Taxation Agreement with the USA which allows your pension to grow tax free in Malta whilst avoiding all UK taxation including the 55% tax upon death in the UK and UK income taxes of up to 50%. There is no tax in the UK or Malta if you intend to take your pension income in the USA.
You would pay US income taxes when remitting your pension to the USA in retirement. However, we can also minimise these taxes by taking part of your pension as a tax-free lump sum rather than income. Click here for more on tax filing for a QROPS USA. If you retire outside the USA, you would pay income tax in your country of residence at retirement.
US Approved QROPS Investments
Your pension trustees would be based in Malta, however your pension monies would be parked in the Isle of Man and you can invest in most shares, funds, ETF’s, bonds and treasuries on most of the world’s major exchanges like the FTSE100 and S&P500 or you could keep your pension in cash in an offshore account. You choose the currency and you can choose the investments or let our skilled advisers choose for you depending on your risk type.
US FACTA Compliant QROPS – HMRC Approved
For British expats who live in the USA and want to transfer to a QROPS USA, we have a solution. Incorrect transfers could end up with the IRS crawling all over you demanding a 30% withholding tax and a penalty of between 2% and 10% for late filing and up to US$10,000 fine for tax evasion. We have a safe solution which allows you to transfer your pension to USD through a pension transfer whilst complying with HMRC (the UK Inland Revenue) and the IRS in the USA.
We have a US, FACTA compliant QROPS. The investments we use are regulated by the SEC, FCA, FSA, NYSE and FINRA. This is an actively managed US Dollar account. Your pension is looked afte by professionals and rebalanced on a monthly bases.
Please contact us today for a free pension transfer analysis and ask us a question about our QROPS USA solution.
What are the Fees for a USA Approved QROPS in Malta?
The fees for UK pension transfers to the USA have just dropped substantially.
There is a 1200 GBP set up fee and then it is 1200 GBP annually. A QROPS in Hong Kong is substantially cheaper. Please email us for the latest fees.
We can then target higher annual returns of 8% to 10% after fees depending on your risk profile. If you want a low risk pension, we can park your pension in cash or bonds.
If you have a smaller pension, it may be better to transfer your pension to a UK SIPP (Self Invested Personal Pension) in USD. This would then be under UK rules. The advantage is that you would be allowed flexible drawdown and the fees are much cheaper at around 300 GBP per year. The drawback is that you would have to pay UK taxes, but for smaller pensions, you could be in a lower tax bracket.
QROPS USA is developing all the time and we are constantly on the look out for quality trustees who can deliver a value solution for clients.
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Please send enquiries to: email@example.comQualifying Recognised Overseas Pension Scheme | QROPS USA Transfers by Richard Malpass