The imposition of the Overseas Transfer Charge (OTC) on certain QROPS earlier this year has narrowed the range of options for those considering UK pension transfers to the US. There is still a demand however from US citizens or foreigners living in the USA for an appropriate transfer vehicle.
The good news is that this ‘tax’ is avoidable. It is important though to select the correct structure in order to create a new pension that is fit for purpose.
The OTC applies to any transfer from a UK pension which is not to an EEA country or to a scheme where a QROPS compliant pension scheme exists. As such, if someone residing in the US now wishes to transfer their UK pension to a QROPS, they will either have to leave it where it is, swallow the tax charge or alternatively move to a Self-Invested Personal Pension (SIPP).
A viable solution for UK pension transfers to the US
Traditional UK SIPPs could be the answer. However, many of these are Sterling-biased and offer few options for investments into other currencies. Anyone retiring outside the UK who retains investments in Sterling could be subject to potential losses simply due to the currency situation. Indeed, there have been numerous accounts over recent years of pensioners having suffered drastic reductions in their pension income as a result of a weakening Pound.
The solution for UK pension transfers to the US is to use an International SIPP with a suitably flexible investment portfolio underlying the basic structure. Portfolio structures can be denominated in most major currencies. For those retiring in the USA, the US Dollar would generally be the currency of choice. Assets can thereafter be purchased in any currency. Once again, it would make sense to invest in US Dollar based securities.
Exchange Traded Funds grow in popularity
The best structures enable plan-holders access to any mutual fund, individual equity, bond or other security. Exchange Traded Funds (ETFs) are very popular in the USA, due to being a low-cost and effective way of managing money. Some ETFs carry as little as 0.06% annual management fees, although a rule of thumb would be to expect something in the region of 0.25% p.a. ETFs follow market indices and are thus classified as passive investments. Options are available which offer an element of active investment, allowing a fund manager to create a spread of ETFs that can be altered as and when opportunities arise. This approach offers the best of both worlds.
By using an International SIPP, UK pension transfers to the US can avoid being caught in a Sterling trap. Transfers from either Defined Benefit or Defined Contribution plans qualify subject to the rules of the ceding scheme. Where there’s a will, there’s a way!