SIPP vs QROPS: Transferring UK Pensions
For those living in the US with a UK pension, what is the best strategy to make the most of your retirement fund?
This article looks at two of the main options for those looking to transfer their UK pension – SIPPs and QROPS.
Putting the Q in QROPS
Since their introduction in 2006, Qualified Recognised Overseas Pension Schemes (QROPS) have been a popular choice for expats looking to move their pensions out of the UK. More recently, HMRC dropped the word ‘Qualifying’ in an effort to make it clear that these schemes were not actually formally authorized and referred to them simply as ROPS.
QROPS/ROPS schemes have been heavily marketed to US residents over the past decade, however, the US tax implications of transferring a pension out of the UK were unclear at best.
In 2011, the IRS published a letter that specifically referenced the transfer of a UK pension to a third country such as Malta and went on to state that this transfer would be taxed as income in the USA.
Changes to the UK Finance Act in 2017 also introduced a 25% tax on pension transfers out of the UK unless one of three new conditions were met.
1) The pension holder and the pension trustee must be in the same country
2) Both the pension holder and the pension trustee must be in the EEA (European Economic Area)
3) The pension trustee must be the pension holder’s employer
There are no ROPS schemes listed in the USA. This means for US residents the only option is to make a transfer to a QROPS in a third-party country like Malta, Gibraltar, or Hong Kong. Since this would not meet any of the above conditions, it would incur the 25% tax in the UK.
Any such transfer would almost certainly be followed up with further tax payable in the USA, both at a Federal and State level.
So what are the alternatives?
Self-invested personal pensions (SIPPs) are another option for transferring a UK pension.
Unlike QROPS, the IRS
has published more than one letter stating that the transfer of a UK pension to another UK pension would not be a taxable event in the USA.
For example, an IRS memo in 2008 remarked, “If a U.S. resident transfers his or her account in a U.K. scheme to another U.K. scheme in accordance with the applicable provisions of U.K. law, Article 18(1) of the Treaty would require the United States to refrain from treating the income earned by the first-mentioned U.K. scheme as a distribution that is currently subject to U.S. tax.”
So when it comes to managing a UK pension when you are living in the USA, a SIPP can be a favourable option.
Investing with a SIPP
As the name implies, SIPPs are designed to be ‘self-invested’. But that does not mean you need to make the individual decisions yourself. Unless you are an investment professional, it is often advisable to make the ‘investment decision’ to engage a professional investment manager to make those day-to-day decisions on your behalf.
As a SIPP is a UK pension, it will always have its value quoted in Pounds Sterling. However, you can work with your investment advisor to hold assets across a range of currencies, or even 100% in US Dollars, enabling you to reduce the fluctuations that the exchange rates have on the US Dollar value of your pension.
The right strategy
The rules and regulations surrounding pensions
are complex. Knowing the best strategy for your pension requires careful planning.
Don’t take a gamble on your retirement fund; seek professional advice before making any decisions.
At Archway Private Wealth, our team of US regulated advisors have the experience and knowledge to help you make informed decisions about your UK pension.
We are part of Holborn Assets
, one of the industry’s largest and most trusted names. Holborn Assets have won multiple awards from leading institutions for excellence in client services.
Archway Private Wealth shares the same commitment to excellence, and with the strength of a global company behind us, you can be sure that you are in safe hands.
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