The American dream can turn into a nightmare for expats wanting to switch their UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS).
Thousands of expats cross the Atlantic both ways with London home to Americans in sectors such as finance, entertainment and media, while Florida is a popular retirement destination for British retirement savers.
However, although two US pension plans have QROPS status, according to the latest HM Revenue & Customs (HMRC) QROPS List, few UK pension providers can transfer funds from Britain into them.
That’s because UK and US pension laws do not align.
UK and US tax rules don’t align
Both countries have ‘tax qualified’ pensions supervised by regulators and tax authorities – the Internal Revenue Service (IRS) and HMRC – but the terms and conditions of the qualification are widely different.
Because of this, US pensions, including QROPS, cannot accept transfers from an overseas fund with triggering a tax penalty.
As a US taxpayer with UK pension benefits or a British expat in the US, you would also need to sit down with a calculator to work out if transferring to a QROPS in another country and drawing benefits in the US would be cost effective.
Under double taxation rules, pension benefits from the UK may be taxed in the US but that tax can be managed by flexible access drawdowns from a UK scheme.
QROPS and FATCA
On retirement, QROPS members can also request HMRC to instruct their pension provider to send their pension payments to the US gross instead of net of tax. The form would be rubber-stamped by the IRS to confirm tax residence in the US.
One Malta QROPS is also offering flexible access to QROPS cash under the same terms as the UK rules – but whether would improve an expat’s tax status in the US would depend on Malta’s tax treaties with Washington DC.
Another consideration is the US Foreign Account Tax Compliance Act (FATCA). Under FATCA, a transfer by a US taxpayer to a QROPS is a reportable event – and as Malta has an intergovernmental agreement with the IRS, any information about funds going into a QROPS will be transmitted to the IRS.
Churchill may have joked that America and the UK were one nation divided by a common language – but they are also two nations divided by tax qualifying pension rules as well.
This article reviews some technical information and basic understanding of QROPS for USA residents and citizens. However if you are looking to transfer your UK pension to a QROPS you must seek qualified financial advice. A financial adviser will determine whether a QROPS is the right place for your pension and guide you through the process.
If you would like to be put in touch with a qualified financial adviser, please contact us via the contact form here for a referral.