QROPS for US Residents
QROPS for US residents – are they still a viable solution?
From 2014, transfers to QROPS were an efficient way to transfer a UK pension plan to a US compliant solution. Transfers took the pension outside of UK jurisdiction (typically to Malta) and allowed for gross payments to be made from the scheme. The QROPS member would then pay tax on the income in the USA through the double taxation agreement (DTA) between Malta and the USA.
It was particularly beneficial for individuals at or nearing their lifetime allowance. The transfer would be classified as a benefit crystallisation event (BCE) and would be subject to a lifetime allowance test at the date of transfer. But, post-transfer, the pension could grow free of the LTA charge.
This was a generous pension option recognised by the HMRC. However, like most lenient taxation rules, it began to be exploited by individuals.
As a result of this, the chancellor announced an overseas transfer charge during his budget on 8th March 2017.
Overseas Transfer Charge (OTC)
The overseas transfer charge was introduced on 9th March 2017. For anyone transferring their UK pension to a QROPS who were not resident in the European Economic Area (EEA), a 25% charge was levied on the transfer value.
If you were a US resident and transferred to a QROPS, HMRC would immediately take 25% of the fund value upon transfer. For example, if you had a pension pot valued at £1 million, £250,000 would be removed. Because of this, any transfers to a QROPS for US residents were made obsolete and it no longer became a suitable option for US residents.
Are there any other solutions than a QROPS for US Residents?
An alternative solution for US residents is the International SIPP (ISIPP). The ISIPP is essentially the same as a standard UK SIPP, except that it’s specifically designed for non-UK residents who have built up UK pensions.
The International SIPP is regulated in the UK and therefore benefits from the FCA’s regulation and protection. It also allows for flexibility in terms of currency holdings, access and how it is invested. There is also no charge for transferring like a QROPS.
Moreover, the ISIPP is US compliant which means there are no nasty surprises from the IRS on transferring your UK pension benefits.
The following are some of the benefits of using an International SIPP:
- Low cost – up to 3/4 times cheaper than a QROPS
- Avoid the -25% Overseas Transfer Charge (OTC)
- Wide range of investments available – ability to invest in USD
- Ability to apply for a Nil Tax (NT) code and have the income paid out gross of UK taxation – you would just declare the income/drawdown taken in the USA
- Multi-currency options – GBP, EUR & USD – this helps to mitigate currency risk as you can invest and drawdown in the currency of your residency e.g. USD for US residents.
- Used in conjunction with an investment platform where you can monitor your investments and their performance
How do you know if a pension transfer is right for you?
This all depends on your situation. It’s important to look into your current scheme to identify the costs, accessibility and performance. Some UK pensions are invested in generic fund ranges not specific to your position, and they may not allow flexible access, particularly if you are a non-UK resident.
At Harrison Brook, we are US and cross border licensed. We gather information on your objectives and current position to determine if we can offer a solution that would be better suited for you.
If you are interested in assessing your UK pension scheme and the options available as a US resident, please get in touch for a free, no-obligation consultation.