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 benefits.  Different jurisdictions may place significantly different controls on the fund and benefits. 

Most people worry about changes in UK legislation but for personal pensions the regulatory and investor protection regime is pretty comprehensive.  The most recent change in UK legislation for pensions have, in general,  been accepted positively by pensioners and financial advisers, but the imposition of withholding tax on dividends is the first tax we have seen on UK Pension funds. Thus, they can no longer be denoted as tax free.

US 401(k) retirement plans

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.

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

• on what age you can start taking benefits,
• the level of benefits
• and an age, about 701/2 years old, when you must take benefits in the form of an annuity.

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.

Alternative Offshore Pension

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 40% 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.

Death Benefits

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.