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Retirement should be a time of relaxation, a time to enjoy what you have worked so hard for over so many years. It comes as no surprise that many UK residents look towards other countries for their retirement, where their pension has the potential to be worth more due to favourable exchange rates, living costs lower, and sunshine in abundance. This has led many UK expats resident in the USA to look for a solution that allows more flexibility for their pension fund.
Transferring your pension between countries can be a complicated process and could incur tax penalties, if not done carefully. Foreign-born workers returning to their home country after contributing to a UK pension fund after five or more tax years worked, and UK citizens looking to retire elsewhere would have the option of transferring their pension funds to a Qualified Recognised Overseas Pensions Scheme (QROPS), now simply known as a ROPS.
Alexander Beard (USA) LLC., has created a financial guide for UK Expats living in the USA that you can download for free here
What is a ROPS and what are my transfer options?
A ROPS is a Pension Scheme based outside of the UK that meets the requirements set out by HM Revenue and Customs (HMRC) to receive transfers from a UK pension fund. HMRC established these rules in 2006 to assist UK Expats in simplifying their financial affairs.
Alternatively, they could leave their pension fund with their workplace or private pension provider after leaving the UK. The benefit of this, or otherwise would depend on individual circumstances and may not be an option for many foreign workers still changing jobs during their career. You will also be taxed on pension income in the UK unless you live in a country where a dual taxation agreement exists with the UK. This is not a cut and dry process and consulting with a qualified professional would be your safest bet.
Many UK Expats, who moved to the USA, found it to be a tedious and challenging process, which we aim to address in this article.
If you have contributed to more than one pension plan, you could consolidate and manage your funds more efficiently into a single ROPS. Most ROPS have a multi-currency feature which can assist with managing foreign currency exchange rate risk more effectively. Of course, you may wish to remain in GBP which is also possible.
What taxation will I be subject to?
Many reasons have been marketed in relation to transferring your UK pension to a ROPS and saving tax has always been a contributing factor. UK pensions are normally taxed at source, you may however apply for an NT tax code which has the effect of passing the taxing rights to your country of residence. There is another UK tax that you need to be aware of, known as the Lifetime Allowance tax (LTA). This could affect individuals with a combined value of UK pensions above a particular limit, currently £1,073,100. A transfer to a ROPS could help mitigate this tax, however, this is a complex area of UK pension legislation and so we recommend you contact a cross-border pension expert to discuss in more detail.
UK Inheritance Tax (IHT) is, typically, no longer applied to UK pensions, this treatment was amended some years ago. However, under certain specific circumstances, the HMRC may still apply IHT and for a US resident, we would recommend you speak with an expert, this is where we can help.
You can choose where to invest under the ROPS umbrella, they tend to offer a varied investment proposal, but this can also be rather expensive. This is because many ROPS providers can require an investment bond wrapper to hold the underlying investment(s) which add costs. In addition, many of these bond wrapper providers can also apply penalties, if you decide to close or transfer to another provider. These penalties could require a minimum holding of up to 10 years but tend to reduce the longer you use the bond.
A ROPS, typically, allow members to access their pension from age 55 and can offer the same 25% tax-free lump sum as UK pensions. This tax-free lump sum status will depend upon your country of residence at the time of taking it.
Currently there are no USA pension on the ROPS list and so a transfer of your UK pension to the US is not possible. However, in the past, you may have transferred your UK pension to a Malta ROPS, if the transfer took place before April 2017.
There has been much debate regarding UK pension a Malta ROPS as a US resident. For a US resident, these legacy pension transfers could be deemed by the IRS as a taxable distribution and taxed accordingly but some feel that the IRS would not treat them this way and accept them as a rollover (to use a US term). We have always believed that since there is no clear confirmation, from the US tax authorities, that a transfer to a Malta ROPS for a US resident is not a taxable event, we have not recommended this course of action.
US residents are required to report overseas pensions to the IRS
It is important to note that the Chancellor of the Exchequer announced a 25% overseas transfer charge on transfers to ROPS on or after 9 March 2017, if you do not live in the same country where the ROPS is established, specifically in response to the future loss of taxes on transferred UK pensions. Therefore, it is becoming increasingly likely that UK pension Trustees will no longer allow these transfers to take place.
Furthermore, HMRC requires 10 years of reporting, when a UK pension is transferred to a ROPS, from the original UK provider. Failing to adhere to this rule, could incur a tax penalty. In addition, the new rule amendments included the reporting of any ‘payments made to a member within the first 10 years from the date of transfer'. If this has been the case, the HMRC may or may not consider acting and will depend upon various factors.
In addition to the possibility of an IRS tax charge, a 55% tax charge could apply if you transfer to a scheme that fails to meet the ROPS criteria set out by the HMRC. The above are all circumstances best resolved with the assistance of a qualified adviser well versed in ROPS and UK pension schemes.
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If you have transferred to a QROPS and are unhappy about the service or advice you have received, you could switch entirely out of your current arrangement. This will depend on where you are in the 5-to-10-year investment period that most international firms apply and how close you are to income withdrawal age. With so many facets to consider, it is imperative to consult with financial experts to aid you with your retirement finances.
Alexander Beard (USA) Inc., offers financial, investment and pension advice from dual authorized and qualified US/UK specialist advisers. For a free consultation, contact info@abg.net or complete the forms on our website.
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