Tom Zachystal

Tom Zachystal is CEO, President, and Chief Investment Officer of Individual Asset Management (IAM), a Registered Investment Advisor (RIA) specializing in UK pension transfers (QROPS), portfolio management and financial planning services for expatriates.

Click here to read an in-depth interview with Tom or click here to submit a question for Tom to answer publicly next month (please note that Tom is only able to answer a selection of questions received but all questions are read and considered.) Alternatively, click here if you would prefer to discuss a UK pension transfer privately (for US investment advice click here).

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06/02/10

Previously we looked at the people, agencies, and costs involved in the transfer process and here we will summarize the paperwork that typically needs to be completed.

Whether you are dealing directly with a QROPS administrator or with an intermediary, you will be asked to complete a letter of authority that allows the agent to contact your UK pension administrator on your behalf to obtain information regarding your benefits. The agent will inquire regarding the transfer value of your benefits, whether you have any protected rights to transfer, and as to the paperwork the scheme requires to be completed in order to facilitate a QROPS transfer.

If an LOA is requested in advance of transfer then, once the QROPS agent obtains information regarding your pension scheme, he will contact you again to discuss whether to proceed with the transfer. You may need to provide the following information for the LOA:

- Full name as it is on the pension documents
- Date of birth
- National Insurance number
- Type of pension scheme
- Name of UK pension scheme and policy number

Alternatively, if you already have much of the information regarding your UK benefits on hand, perhaps because you receive regular pension statements or perhaps because your UK pension administrator has contacted you regarding your options with respect to the pension, then you may have already decided that a transfer to a QROPS is the way to go. In this case the QROPS agent may ask you to complete a generic set of transfer forms that request your UK pension scheme to transfer your benefits to the QROPS and that include the LOA. Some pension schemes will act on the QROPS generic forms, in which case your transfer should then proceed, but some will insist that their own transfer forms be used, in which case these will be sent to your QROPS administrator for you to complete.

In addition to the above-mentioned information, the following forms/information generally is required for the transfer to proceed:

- Proof of residency and proof of identity: These may need to be certified or notarized and could be copies of documents such as your passport and a utility bill showing name and address.
- A statement regarding when you gave up UK residency.
- A statement regarding your expected or actual retirement age.
- A “Lifetime Allowance Declaration”: A QROPS transfer is what is known as a “benefit crystallization event”; as such, the transferred amount must be tested against the HMRC lifetime pension withdrawal allowance limits. If these limits are exceeded then HMRC assesses a special tax.
- Forms required to establish a QROPS pension account or an account within the QROPS. Some QROPS providers will establish a separate trust account for each client and obtain QROPS approval for each client separately, whereas in other cases there is a master trust structure that has been approved for QROPS status and clients have sub-accounts within the master trust. The former arrangement is generally more expensive but also more flexible in terms of what investments can be held and administrative issues.
- You will also likely be asked to acknowledge your understanding of certain HMRC regulations concerning QROPS issues, pension-sharing agreements, and pension options.
- If you are transferring protected rights then you will also have to complete HMRC form CA1881 or CA1890 depending upon the type of pension you have.

Finally, if your transferred money is to be invested within the QROPS, then you will need to complete forms to select your investments.

Clearly considerable paperwork is necessary in order to complete a pension transfer to a QROPS – but there is also plenty of help available from the agents and intermediaries who facilitate such transfers.

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30/11/09

A number of readers have asked how the process of transferring UK pensions overseas typically works. In this part one of a two-part column we will look at the people and agencies involved in the transfer process and the various associated costs. In part two, we will look at the paperwork that needs to be completed and steps that need to be taken in order to effectuate a UK pension transfer.

First let's identify the parties that may be involved in the transfer process:

- At a minimum your UK pension provider and the QROPS administrator must be involved.
- In the case of an occupational scheme, your pension might be administered by a financial services firm on behalf of your company; so your corporate pension administrator as well as the pension company representative might be involved.
- There may also be an intermediary or facilitator. Many firms that advertise UK pension transfer services do not actually administer a particular QROPS; rather, what they do is gather the necessary client information and advise the client as to the pension transfer process. The intermediary may work with a number of QROPS located in various jurisdictions, and therefore may be able to advise the client as to the best jurisdiction for his/her purposes.
- Once your pension has been transferred to the QROPS, you may wish to invest your money and at this point an investment advisor may be involved.

Now let's summarize the costs you may face when undertaking to transfer a UK pension to a QROPS:

- On the UK side there may be an administration fee from your pension provider. There may also be fees for withdrawing from certain types of investments or for cancelling your investment account.
- Intermediaries typically charge an up front fee for the pension transfer and may also (or instead) receive ongoing fees from the investments into which your transferred funds are placed once they are transferred to the QROPS.
- The QROPS administrator may also charge a transfer fee and/or may receive an ongoing administration fee either from you or from the investments into which you place your money within the QROPS.
- Investment advisors typically charge ongoing investment management fees and may also charge a one-time fee when each investment is purchased. So if you plan to invest your money within the QROPS then you will have these fees as well (but of course you would have similar fees in the UK pension plan). Often the ongoing fees are not spelled out - rather they are taken from your invested amounts over the course of time.

In addition to these direct costs, you should consider "opportunity cost". There are many good reasons to transfer your pension scheme to a QROPS: Typically there is no need to annuitize the pension, you can leave the residual amount to your heirs, you may be able to withdraw a greater lump sum than under UK regulations, and so on. However, you should also consider what you will be giving up, especially in the case of a final salary pension plan. This type of plan (also known as a defined benefit plan) typically gives you payments for life after you retire based upon the amount you were making when you left your employer. This could be a substantial amount and may be more than you could realize by transferring your pension and investing your money - thus leaving your pension savings open to the vagaries of investment markets.

One final potential cost to consider is that of taxation. You may be able to move your UK pension to a QROPS in a jurisdiction where you will benefit from a lower tax rate on the pension funds you withdraw, but tax issues can be complex. The tax treatment of your pension may depend upon the provisions of a tax treaty involving your country of residency and the UK (or your country of residency and the QROPS jurisdiction). By moving your pension from the UK to a QROPS in another jurisdiction you may be jeopardizing benefits available to you under a UK/country of residency tax treaty. This is the case, for example, for US residents who can benefit from tax treaty provisions in the UK/US treaty but who may lose these benefits by transferring to a QROPS in a country with which the US has no treaty.

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26/8/09 - Ram asks:

"I am a US resident with a UK pension – can I transfer my UK pension to the United States?"

Tom's reply:

Many UK pension-holders are now US residents and this is a very common enquiry. The United States is a bit of a special case in the world of UK pension transfers as a result of the fact that QROPS do exist in the US but they are not practical for UK pension transfers due to US tax regulations.

Certain types of US pension accounts can meet the requirements for QROPS status; 401ks and IRAs (similar to UK occupational schemes and SIPPs) for example. A number of companies who sponsor such accounts have obtained QROPS status for their pension plans; so as far as the UK tax authority, HMRC, is concerned a UK pension transfer into such an account could proceed.

The problem is that the US tax authority, the IRS, does not allow tax-free transfers into such accounts from non-US pension plans. This is a very important point that is sometimes not understood by sales people working for the companies that have obtained QROPS status for their US plans.

I have received enquiries from US residents who have been told that their IRA sponsor is willing to accept a transfer from their UK pension scheme and that their plan has QROPS status. Indeed such a transfer would be technically possible to complete since HMRC would allow a transfer to a QROPS. Unfortunately these sales people clearly do not appreciate the US tax implications of such a transfer. The IRS would consider this to be a distribution from a foreign pension plan and most likely a taxable event for a US resident under the provisions of the US/UK tax treaty. The actual US tax implications of such a distribution are too complex for this column but suffice it to say that it is possible that the entire transferred amount could be taxable to the US resident as income.

However, that is only half the story because not only would the money have been taken out of a UK plan but it would also have been contributed to a US plan in one lump sum. US pension plans have limits as to how much can be contributed in any given year. These limits vary depending upon a number of factors including the type of plan and the age and income of the participant. If the contribution from the UK plan is over these limits then the IRS would consider this to be an “excess contribution”, which would be subject to stiff tax penalties.

It is also not attractive (and likely not even possible) to transfer your UK pension directly to a US bank or brokerage account since such an account would not be able to obtain QROPS status and therefore such a transfer would, under most circumstances, be considered an unauthorized payment by HMRC, and subject to a 55% tax penalty.

What may be possible under certain circumstances is to transfer your UK pension to a QROPS in another country and then to take a distribution from the QROPS to a regular bank or brokerage account in the US. I would highly recommend that you consult with an advisor who is very familiar with QROPS regulations, US tax regulations, and the tax and pension regulations in the jurisdiction of the QROPS, before you do this.

You should be aware that for the first five years after you give up UK residency you are still subject to UK pension regulations, even if you transfer to a QROPS – so you need to be careful to take only “authorized” payments according to HMRC regulations during this time period. After the five years are up, you will be subject to the pension regulations in the jurisdiction of the QROPS – so you would need to check whether further distributions are possible under these rules and whether such distributions would be taxable. Furthermore, depending upon the provisions of the US tax treaty (or lack thereof) with the country in which your QROPS is located, you may be subject to US tax on distributions from the QROPS. Possibly you might even be subject to US tax on investment gains if you leave the money in the QROPS, or the IRS might consider the transfer from the UK plan to the QROPS to be a taxable event in the US – it all depends on the tax relationship between the US and the jurisdiction of the QROPS. As you can see, these are complex matters for a US tax-payer and professional advice would be a good idea.

Another thing to consider with such a transfer is that you would be moving your money from a tax-deferred account to a taxable account. There is considerable benefit to tax-deferral of investment gains - especially in accounts that are intended to provide for retirement. You should seriously weigh the benefit of having the money in hand to do with as you please versus the benefit of growing your savings tax-deferred.

One final word – recently I have heard about companies proposing to transfer UK pensions directly to US annuities. I haven’t looked at this strategy in detail and would welcome further information on the topic but it seems to me that it would be a stretch to have a US annuity qualify as a “pension scheme” in order to obtain QROPS status. Furthermore, such a transfer would clearly not result in avoiding annuitization of the UK pension – one of the major reasons why many people transfer their UK pensions to QROPS.

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17/7/09 - Simon B. asks:

"I have heard that it is possible for British expats to transfer their UK pension schemes to overseas pension schemes called “QROPS”. What is a QROPS and why would one want to do such a transfer?"

Tom's reply:

For UK pension-holders who have moved outside the UK or intend to do so in the near future, substantial benefits may be realized by moving the pension to an overseas pension scheme as a result of the fact that non-UK pension regulations are often more flexible than UK rules. This option is available to all British pension-holders, regardless of citizenship.

Most types of pensions are transferable, with the exception of state benefits and certain pensions dating prior to 1986.

Individuals who leave their pension schemes invested in the UK are likely to only be able to access 25% of their fund as a tax free cash lump sum at the earliest from age 50, rising to age 55 from 2010. The remaining 75% of the fund cannot be taken as a cash lump sum but must instead provide an income which is subject to processing delays as well as international banking charges, exchange rate fluctuations, and, more importantly, income tax. Furthermore, anybody trying to make withdrawals outside of these limits is likely to face penalties, in the form of a tax charge imposed by HMRC, of up to 55% of their pension fund.

Major legislative changes imposed by Her Majesty’s Revenue & Customs (HMRC) in the United Kingdom came into force on April 6th 2006. Known as Pensions ‘A’ Day, the new rules affect virtually every UK pension scheme (other than state benefits). Anybody who has ever worked in the UK and may have left a pension scheme there is likely to be affected if they have not yet started to receive an income from it.

The new rules and changes have given rise to the Qualifying Recognised Overseas Pension Scheme (QROPS). This is an investment vehicle that allows existing UK registered pension schemes to be transferred overseas for those individuals residing, or intending to reside, elsewhere. To qualify as a QROPS, the pension scheme must be officially recognised by HMRC and satisfy strict reporting duties, otherwise the status is lost.

If the individual stays in the UK, a QROPS would be able to pay benefits in line with, and that do not exceed, those which could be paid if funds were still held in the UK scheme. However, upon ceasing to be a UK tax resident for five full UK tax years there are no longer any reporting requirements on the QROPS to the HMRC and only the rules pertaining to the QROPS and its place of origin / registration apply. Basically, the five year period is a time of transition over which the rules of a UK scheme continue to apply; after this period, the rules in the jurisdiction of the QROPS prevail.

The benefits available after the five-year non-resident time period depend upon the pension regulations in the jurisdiction of the QROPS and on the QROPS’ own rules. In jurisdictions where QROPS schemes are open to non-residents, one can generally benefit from the following:

- No need to annuitize payments.
- No or low withholding tax on distributions.
- Greater investment control of your pension money.
- Ability to pass remainder of pension to heirs upon death.

In addition, certain jurisdictions also allow the release of more than the 25% lump-sum available under UK rules and may allow the release of these funds earlier than the UK age limits.

Clearly the choice of QROPS jurisdiction is key, as this determines the benefits available following the five-year non-residency period. Also, care is required when selecting the QROPS itself, as a number of QROPS have been shut down by HMRC over the years for various infractions, leaving their clients in limbo as to the status of their transferred pensions.

Many QROPS do not have residency requirements, so even if one is a resident of Spain, for example, one might be able to transfer the UK pension to a QROPS in the Channel Islands or New Zealand. Thus shopping around for the best jurisdiction is possible and may yield substantial tax benefits compared to using a QROPS in one’s country of residency.

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Click here to read an in-depth interview with Tom or click here to submit a question for Tom to answer publicly next month (please note that Tom is only able to answer a selection of questions received but all questions are read and considered.) Alternatively, click here if you would prefer to discuss a UK pension transfer privately (for US investment advice click here).

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