Living in America but having a UK-based pension scheme will be extremely problematic should you wish to retire stateside. Even by living in the States currently – whether as an expat or US national – you are required to report all assets and income to the IRS, and if you fail to declare a UK pension within your report, the penalties can be huge.
Dealing with the IRS
The only way to deal with this for the majority is by looking into a Qualifying Recognised Overseas Pension Scheme. In America, there are currently 15 schemes on the HMRC list, but only one of these – the Fidelity 401k – is open to transfers and not a company sponsored arrangement. The trouble is that the IRS does not look too fondly upon transfers form any UK pension scheme into a 401k, and as such the majority of funds contained in any transfer will be taken as penalty for what the IRS sees as an illegitimate transfer.
Finding a FATCA compliant USA QROPS is relatively straightforward now though, and the answer does not come from the US. Malta is the destination of choice. By transferring your UK pension into a Maltese-based scheme you are able to take advantage of the relatively recently signed Double Taxation Agreement between the two countries, and this means that the IRS will recognise the pension coming out of the UK and will not subject it to the same treatment it would if the scheme remained in the UK.
This is advantage enough for most, but QROPS also offer the following additional benefits:
- No UK income tax
- Choose to have funds in USD to avboid fluctuations
- No tax liability on growth
- Wide range of investment choices
- Portability between jurisdictions
- Early retirement options
- Up to 30% tax free lump sum upon retirement