QROPS transfer to US 401(k) retirement plans
Gerard Associates Ltd. Financial Advisory Services does not provide advice on any products from a USA jurisdiction and nothing contained in this briefing should be construed as such. We make every effort to ensure the accuracy of the information but cannot be held responsible for any liability arising.
It is essential that all clients seek tax and financial advice specific to their own personal circumstances with the relevant tax professional of the jurisdiction(s) in which you are liable or could be liable to tax.
This has been prepared based on our understanding of US 401K Pensions with Fidelity. However, these are subject to change, and may result in tax consequences different from those detailed below.
We cannot accept responsibility for its interpretation, accuracy or any future changes to law.
One of the main reasons to undertake the transfer of a UK pension fund to an overseas scheme is to achieve greater flexibility with regards to the methods of using those pension benefits. Different jurisdictions may place significantly different controls on the pension fund and benefits.
Several US 401(k) retirement plans are listed by Her Majesty’ Revenue and Customs as qualifying recognised overseas pension schemes (QROPS) and are able to facilitate a pension transfer acceptance.
But the IRS will not permit acceptance of a UK registered pension scheme assets into a 401K or similar USA Pension account (see below).
Advice is essential as what may appear to be an obvious QROPS transfer solution can lead to greater tax liabilities in the future. Double taxation agreements between the USA exist with the UK but many QROPS jurisdictions have no such agreements. The USA also has strict guidance to how Pension funds accumulated whilst non resident alien are treated for tax purposes.
Use our Quick Enquiry or Contact us page if you have any queries about QROPS and US Pensions. .
Pensions in the USA The US system of Personal Pensions is not dramatically different to elsewhere. You place money into a designated account and receive a tax enhancement on the proviso you use the accumulated fund to provide income in retirement, relieving the state of some financial burden.
As with many jurisdictions, the US system has controls
Defined contribution schemes are the main pension provision in the USA. About 20% participate in defined benefit schemes. It is estimated that over 50% of the working population is a member of a pension scheme. The 401(k) plan is the most common defined contribution scheme in the USA. 401(k) plans benefits from tax-deferred contributions from employers and employees from their salaries to the plan. Most 401(k) plans provide retiring employees with several options for receiving the accumulated sums. Lump-sum payments, regular payments for a fixed term and annuities are available. Members are also able to defer any payment until a certain age. In addition to the popular 401(k) plan, the following scheme types may be available to provide pension provision: • 403(b) plans: These are employer-sponsored retirement plans. Specifically for employees of Universities, public schools, and non-profit organisations to make tax-deferred contributions from their salaries to the plan. • 457 plans: These are employer-sponsored retirement plans, which enable employees of State and local governments to make tax-deferred contributions from their salaries to the plan. • Thrift Savings Plans: These are employer-sponsored retirement plans that enable employees of: The Federal Government to make tax-deferred contributions from their salaries to the plan. • Employer-sponsored IRAs These give small employers (those with less than 100 employees) a simplified method to contribute toward their employees' pension. • SEP IRAs: Simplified Employee Pension plans do not have the same start-up and operation costs as conventional work-based retirement plans and are designed mainly for small businesses as well. Trustees of SEP-IRAs are generally banks, insurance companies, mutual funds and other approved financial institutions. Tax treatment of contributions and benefits Contributions to qualified pension plans can be made on a tax exempt basis subject to certain limits. Dividends and capital gains remaining in the accounts accrue tax-deferred. Only when the money is withdrawn it is fully taxed as income. Employees are allowed to transfer part or all of their contributions to a 401(k) plan as designated Roth contributions. The amount treated as Roth contributions is paid on an after-tax basis and, as a result, does not qualify for tax relief as the payments are included in gross income. Contrary to traditional 401(k) plans, investment returns and benefits remain tax-free. Importantly a traditional 401(k) plan feature that does not apply to Roth 401(k) plans is the forced withdrawal at a certain age.
Of course the value of the annuity depends on how long you live. Live to 100 years and they probably represent great value but live to 71 years and significant capital may be lost.
The tax on benefits are treated as income and the system of state and federal taxes means it can be dependent on where you live as to how much tax you pay. This will need evaluating with US professional advisers and/or the Inland Revenue Service (IRS) in the US.
The US 401(k) Pension does have arrangements where the fund or a proportion of the fund can be lent to the member. However, such arrangements are only available in circumstances of extreme financial strain like mortgage arrears leading to repossession and the paying of medical bills.
For those with substantial pension funds and those that may not be totally dependent on the income the pension could generate, the imposition of having to purchase an annuity may be avoidable.
Offshore Pension Plans typically in the Channel Islands and Isle of Man have a unique planning advantage. Whilst the Pension still benefits from its near tax free status (withholding tax on dividends still cannot be reclaimed) the rules on taking benefits and how the funds are invested are more favourable. Add the fact that there is no compulsion to buy an annuity at any age and the financial planning opportunities are greater.
By avoiding offshore schemes with high up front charges and exit penalties, if the jurisdiction in which you reside has changes in legislation which create a more favourable Pension regime for your funds, a transfer is easily facilitated from the offshore Pension.
Currency fluctuations can place a significant dent in the fund and income generated from it, you need to consider the effects but offshore pensions can be denominated in Sterling, Euros or US Dollars. Income and loans will be in the currency in which the funds are held.
Offshore Pensions can lend up to 25% of scheme assets for any purpose with the resulting repayments attracting interest. Interest does not have to be paid. In this case a tax certificate showing a benefit will be produced and should be declared to the relevant tax authority of residence.
On taking an annuity from a US 401k whilst it may be possible to include some capital guarantees, on death the fund reverts to the annuity provider.
The offshore Pension is written under a master trust arrangement where there is no liability to UK Inheritance tax. The remaining fund will pass to your intended beneficiaries. Any liability to death taxes in the place of residence should be sought from the relevant jurisdictions tax advisers.
Alternative Offshore Pension
Death Benefits
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