US retirement savers locked out of many Qualifying Recognised Overseas Pension Scheme (QROPS) by tax rules now have Internal Revenue Service (IRS) approval to switch their funds out of a British pension.
For many years, the IRS has not considered QROPS and many other international pensions as suitable products qualifying for tax breaks in the same way as US individual retirement accounts or 401(k) pensions.
Lobby group American Citizens Abroad is urging the IRS to consider all foreign pensions in the same way has home-grown pensions, but has met considerable resistance.
However, the IRS has had a change of heart over Canada QROPS that are registered retirement savings plans or registered retirement income funds.
Both are now recognised by the IRS as qualifying tax-free pensions.
Tax boost
“We can make the change due to a provision in a tax treaty between the US and Canada,” said an IRS spokesman. “US citizens and resident aliens can defer tax on income growing in their pensions until the money is distributed otherwise US tax would have been due on the fund growth.”
Canada has is one of the world’s leading QROPS financial jurisdictions with 95 pensions included on the last HM Revenue & Customs (HMRC) QROPS List, published on November 1, 2014.
Many of these QROPS are registered retirement savings plans.
Previously transfers in or contributions to such schemes would be considered as foreign earnings and would be taxed by the IRS.
For US workers who have spent time with a British company and built up pension rights in the UK, this ruling would appear to give them a path to move their money out of the UK to a QROPS that offers several tax and investment advantages .
Pension benefits
The measure also allows British expats in the States a similar opportunity.
The US does have 14 QROPS schemes, but providers find navigating the complex IRS rules regarding offshore pensions a problem.
So what do QROPS offer US international workers and British expats?
Most QROPS offer up to 30% tax-free lump-sums from the age of 55, but special rules for Canadian registered retirement pension schemes can allow full access to retirement funds.
Self-directed schemes also offer flexible investments, with platforms offering a wide range of funds, equities, bonds and commodities.
QROPS can also beat foreign exchange rate fluctuation problems as they can be set to default to pay out in major currencies like US or Canadian dollars rather than Sterling.
Canada’s Revenue Agency publishes a detailed guide on registered retirement savings plans for investors.
