No matter where in the world you choose to live, saving for retirement is an important piece of the puzzle – an albeit more challenging puzzle to complete, since US taxation of foreign pensions and retirement accounts can be tricky to understand. In some cases, these foreign accounts can benefit you financially, but in some others, can negatively affect your expat tax situation. Read on for details about the effect of UK pensions on expat taxes for American expats in the UK.
First Things First: Review Tax Laws
The US-UK Tax Treaty actually covers pension plans set up by UK employers, which means that in general, distributions from the plan will only be taxable where you reside. This would be true for American expats in the UK and vice versa. However, the tax laws of the US and UK differ, so you should ensure you’re aware of the consequences before you dive into the world of foreign retirement plans. In any event, this is something you’ll want to confirm with an expat tax expert. You can also find UK-specific tax information in our UK country guide.
What is QROPS?
A Qualifying Recognized Overseas Pension Scheme (or QROPS, in short) is one that is very popular, as it offers UK citizens more flexibility with investments and transferring funds to beneficiaries. In many cases, American expats in the UK may think transferring their retirement funds into a QROPS plan is a good idea since it’s highly advertised. However, there are some serious expatriate tax implications that you should be aware of before making such a decision.
How Can QROPS Affect Expat Taxes?
Because tax laws vary by country, the rules in the US and UK differ. A ‘tax qualified’ plan in the US may have different regulations than one in the UK. In fact, the IRS doesn’t recognize QROPS plans as qualified pension accounts, which means transfers in and out of the account are considered taxable events – and must be reported on your expat tax return.
Most people appreciate the benefit of tax deferral when it comes to pensions – the ability to deposit money before it’s taxed – but this feature is removed when you opt out of a UK qualified employer pension. Any gains on this type of account would be taxed at your highest US tax rate each year – even if you don’t withdraw any funds.
QROPS and PFICs
Another possible downside of QROPS for American expats in the UK is the fact that most are considered to be Private Foreign Investment Companies (PFICs) by the IRS. PFICs are quite complicated for US expats and require extensive record keeping and reporting to stay compliant with the IRS. Because of this, the time and cost generally negates UK tax benefits of investing in a QROPS account. You can read more about PFICs in this article.
The Role FATCA Plays in QROPS
Another big factor for American expats in the UK when considering a QROPS is whether it will trigger a FATCA filing requirement for you. In general, you’ll be required to file FATCA Form 8938 if you have foreign financial accounts over the specified amounts below:
Single or Married Filing Separately
- Total value of foreign assets is greater than $200,000 on the last day of the year, or
- More than $300,000 at any point during the year.
Married Filing Jointly
- Total value of foreign assets owned by you and your spouse is greater than $400,000 on the last day of the year, or
- More than $600,000 at any point during the year.
This is something you should consider when investing in any type of foreign account, including QROPS. Get more details about FATCA here. Doing extensive research up front can save you a lot of time and money in the long run, so enlist the help of a tax professional for expat tax advice before making big financial decisions while abroad. If you’re looking for more information about expat taxes, download a US expat tax guide for filing requirements and tips for saving money.
Need Advice About Foreign Pensions or QROPS in the UK?
Our team of expat-expert CPAs and IRS Enrolled Agents can provide the expertise you’re looking for when it comes to understanding your expat tax requirements while living in the UK. Contact us today to have your questions answered.