Since the introduction of Qualifying Recognised Overseas Pension Schemes (QROPS) in 2006, expatriates across the world with a UK-based pension have been able to transfer their funds overseas. This has a variety of advantages, most notably a reduction in tax rates, the potential for higher returns and a higher pension income, increased flexibility, no exposure to currency fluctuations and a host of other benefits.
For those living in the US (nationals and residents) however, this was not always the case. In large part this is due to the post- 9/11 PATRIOT act introduced by the President at the time, George W. Bush. The “Anti-money-laundering to prevent terrorism” section of the Act passed in 2001 has had an ongoing impact on the way the majority of US residents are able to conduct their financial affairs.
The Problem
One of the ways in which the legislation works, is that it prevents the transfer of a UK pension into a US QROPS for a US resident. Take a look at the HMRC-published list of QROPS based in America and there are only 14 (at the time of writing) active schemes, 11 of these are 401k plans. Using the PATRIOT Act, the IRS has blocked transfer into all of these schemes, and now that the much-maligned Foreign Account Tax Compliance Act (FATCA) has ‘gone live’, things have got harder.
FATCA prevents almost every well-established QROPS from going anywhere near US nationals across the globe, as well as other nationalities residing within the States.
The Solution
Of course, it didn’t take long for QROPS providers to realise they were missing out on a significant market, so a variety of QROPS options were constructed from the floorboards up, specifically targeted at being IRS-friendly.
These schemes are all based outside of the US, and were formulated based on criteria related to full IRS tax reporting and FATCA compliance, and the necessary and preferentially treated ‘Double Taxation Agreements’ which exist in a handful of jurisdictions globally.
The Result
As a result of these new-founded schemes, thousands of UK pension holders with ties to the US are taking advantage of the benefits to be found in QROPS. The US is hardly recognised globally for offering financial freedom to its nationals, however, a QROPS can offer just a taste for those that qualify.
There are no minimum transfer requirements for a QROPS, however it may not always make financial sense to conduct a transfer, depending on the size of the fund. Always seek expert consultation and explore a variety of options before making any decisions.
