Mario Vitanelli is a writer and blogger who specializes in international politics and finance, retirement and investment for www.iexpats.com. His areas of expertise include European, Asian and the Med region’s economic policy; SIPP schemes and QROPS. When away from his keyboard, he enjoys photography and appreciates the rest of the Vitanelli family’s endless patience with his football dependence.
The United States has never been the land of opportunity for the Qualified Recognised Overseas Pension Scheme (QROPS), unfortunately. For the unfamiliar, the QROPS is a pension investment program for expatriate British pensioners or Americans who worked in Britain long enough to collect a pension. Originally and nominally established to relieve expat pensioners from the burden of paying tax on their pensions in two separate jurisdictions, more recently the preferential tax rates and flexibility of investment have made the schemes tremendously popular.
However, that popularity has so far failed to translate into a QROPS-friendly USA. Since the introduction of overseas pension schemes in 2006, the US has only offered a single brand of pension investment program which basically involves the transferring of a pension into the most common American pension-equivalent, the 401(k). Although the taxes attending that sort of transfer would prove at least as high as those that would apply to a pension that remained in the UK.
The most popular alternative for Americans returning from Britain with their pension has been to take a third-party nation QROPS elsewhere. The Malta is most commonly used, almost exclusively in fact, because of Malta’s QROPS-friendly tax rate and extensive network of double-taxation agreements. The Malta-based-scheme-while-living-in-the-US dynamic because common enough to function as the near-default step taken by an America-bound pensioner, whether British or American.
While there is no shortage of sites advertising the facilitation of Malta-US QROPS and it often proves a great option for British expats, however, the same doesn’t apply to American citizens. Unfortunately, the same rules just don’t apply. By US law, a pension scheme that’s domiciled in Malta is by definition a QROPS and even though the United States has a double-taxation agreement, transferring funds into a QROPS qualifies as a “taxable event”. Although that hurdle can be sidestepped if the American worker has accumulated foreign tax credits sufficient to offset it.
There are also tricky regulatory details that a QROPS specialist may not even be aware of when setting an American client up with an overseas scheme. For example, US financial code considers a QROPS a trust and all trusts have to be reported annually to the IRS (Internal Revenue Service). Failure to do so can result in a punitive non-compliance tax penalty totaling 50% of the scheme’s total worth!
The fact is- it’s hard to imagine anything more complex or bewildering than the ins and outs of international and transnational financial laws, codes, statutes and requirements. For the most part and for most expatriates with a British pension a QROPS is a terrific option- one that can save and make the pensioner money. What has to be remembered though is that in this, as is the case with so many things, there is no panacea or solution that is best for everyone involved. If you’re an American citizen with a pension or anyone else looking to navigate the rocky waters of pension scheme taxation and investment, contact a qualified professional like those at iExpats.com.