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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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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