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Transfer to US 401k Pension or Offshore Pension Plan.
Med-Ex Financial Advisory Services does not provide advice on any
products from a USA jurisdiction and nothing contained in this briefing
should be construed as such. We make every effort to ensure the accuracy
of the information but cannot be held responsible for any liability
arising.
It is essential that all clients seek tax and
financial advice specific to their own personal circumstances with the
relevant tax professional of the jurisdiction(s) in which you are liable
or could be liable to tax.
This has been prepared based on
our understanding of US 401K Pensions with Fidelity. However, these are
subject to change, and may result in tax consequences different from
those detailed below.
We cannot accept responsibility for its
interpretation, accuracy or any future changes to law.
One
overriding issues with the transfer of Personal Pension benefits is the
flexibility to take capital and income and the control various
jurisdictions place on the fund and benefits.
Most people
fear changes in UK legislation but for Personal Pensions the regulatory
and investor protection regime is comprehensive.
The most
recent change in UK legislation for Pensions has been accepted
positively but the imposition of withholding tax on dividends is the
first tax we have seen on UK Pension funds. They can no longer be
denoted as tax free.
US 401k Pension
At present US401k Pensions with a few providers represent the main
schemes to which QROPS has been granted and can facilitate a transfer
acceptance.
The US system of Personal Pensions is not
dramatically different to elsewhere. You place money into a designated
account and receive a tax enhancement on the proviso you use the
accumulated fund to provide income in retirement. Thus relieving the
state of some financial burden.
As with many Pensions
the US system has controls
• on what age you can
start taking benefits,
• the level of benefits
•
and an age, about 701/2 years old, when you must take benefits in the
form of an annuity.
Of course the value of the annuity
depends on how long you live. Live to 100 years and they probably
represent great value but live to 71 years and significant capital may
be lost.
The tax on benefits are treated as income and the
system of state and federal taxes means it can be dependent on where you
live as to how much tax you pay. This will need evaluating with US
professional advisers and/or the Inland Revenue Service (IRS) in the US.
The US 401k Pension does have arrangements where the fund or a
proportion of the fund can be lent to the member. These though are only
available in circumstances of extreme financial strain like mortgage
arrears leading to repossession and the paying of medical bills.
For the majority these rules are acceptable.
Alternative Offshore Pension
For
those with substantial pension funds and those that may not be totally
dependent on the income the pension could generate, the imposition of
having to purchase an annuity may be avoidable.
Offshore
Pension Plans typically in the Channel Islands and Isle of Man have a
unique planning advantage. Whilst the Pension still benefits from its
near tax free status (withholding tax on dividends still cannot be
reclaimed) the rules on taking benefits and how the funds are invested
are more favourable. Add the fact that there is no compulsion to buy an
annuity at any age and the financial planning opportunities are greater.
By avoiding offshore schemes with high up front charges and exit
penalties, if the jurisdiction in which you reside has changes in
legislation which create a more favourable Pension regime for your
funds, a transfer is easily facilitated from the offshore Pension.
Currency fluctuations can place a significant dent in the fund and
income generated from it, you need to consider the effects but offshore
pensions can be denominated in Sterling, Euros or US Dollars. Income and
loans will be in the currency in which the funds are held.
Offshore Pensions can lend up to 40% of scheme assets for any purpose
with the resulting repayments attracting interest. Interest does not
have to be paid. In this case a tax certificate showing a benefit will
be produced and should be declared to the relevant tax authority of
residence.
Death Benefits
On taking an annuity from a US 401k whilst it may be possible to include
some capital guarantees, on death the fund reverts to the annuity
provider.
The offshore Pension is written under a master
trust arrangement where there is no liability to UK Inheritance tax. The
remaining fund will pass to your intended beneficiaries. Any liability
to death taxes in the place of residence should be sought from the
relevant jurisdictions tax advisers.
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