The dangers of using QROPS for US residents and FATCA reporting
by Alexander Beard, on Jun 27, 2014 10:27:22 AM
Qualifying Recognised Overseas Pension Schemes (QROPS) is a legitimate retirement planning tool for the majority of British expatriates. However, care needs to be taken when you are a US resident using a QROPS as there may be significant disadvantages.
There is no structure in place to transfer a pension to the United States therefore those with UK based pension are being advised to use QROPS as a solution to their pension planning. QROPS are being used as a one size fits all approach without thought to how their country of residence views it.
A UK based pension scheme is classed as a qualifying UK pension to the Internal Revenue Service. The double taxation treaty between the two countries clearly defines how benefits from a UK based pension are taxed. UK based pension schemes are also excluded from FATCA reporting. As you can see there is a lot of protection when using a UK based pension for your retirement in the US. However, when a UK based pension is transferred to a QROPS, the pension loses its qualifying status and also becomes reportable under FATCA. If you haven’t amassed enough foreign tax credits, it is likely that the transfer to the QROPS will be a taxable event.
Over the past few years this transfer to a QROPS for a US resident hasn’t been an issue, as the IRS are rarely told the transaction has taken place. Malta, a commonly used QROPS jurisdiction for US residents has signed up to FATCA reporting which starts in 2014, so the IRS will know that a transfer has been made and will look to tax it appropriately.
As I mentioned before, UK pension schemes are excluded from FATCA reporting. One of the areas FATCA identifies is the structure of the underlying investment. If classed as non-compliant, there is also a 30% withholding tax levied. Nearly all normal investments such as collectives used within a pension are non-compliant, especially within a QROPS this will result in another layer of taxation. As you can see when FATCA reporting starts, we believe those who transferred pensions into a QROPS whilst U.S resident will have some difficult choices to make.
We believe anyone considering using a QROPS for their retirement planning in the U.S must get independent specialist tax advice. FATCA reporting will shine a light on QROPS for U.S residents where previously this one size fits all approach seemed to work well.
Founded in 1987, Alexander Beard specialises in U.S / UK cross border financial planning. Its headquarters are in the UK and is regulated by the Financial Conduct Authority. Alexander Beard (USA), LLC, is a registered investment advisor with the California Department of Business Oversight; Insurance License 0C00578; a member of Alexander Beard Group of Companies Limited. Registered in England No. 2144184.