The companies offering this new type of QROPS are not located in the US, as the States remains an inhospitable jurisdiction for such schemes. Instead, they tend to be located in such other jurisdictions as Guernsey and Malta.
The trend comes in the wake of the taking effect, on 1st Jan, of a new double tax agreement between the US and Malta, and after changes in UK tax regulations have made certain other financial planning tools less attractive in comparison to a well-constructed QROPS, according to James Sellon, of London-based American advisory specialists Maseco Private Wealth.
It also comes, say providers, as they get used to the technicalities involved in setting up QROPS, which did not exist until 2006, and they feel more confident about meeting the complex and daunting requirements of the US tax authorities.
‘Long overdue’
Some might say the interest in QROPS for Brits relocating – typically to retire – to the US is long overdue, since the US is their second-favourite destination after Australia.
More than 800,000 Britons are said to live in the US, with sunny Florida and California their preferred states. Sun isn’t the only attraction: The top rate of federal income tax in the US is 35%, compared with 50% in the UK.
Among the most prominent of the new, ‘IRS-friendly schemes’ – as some have taken to calling them – is Guernsey-based Ardel Trust’s Ardel Atlantic Plan, which was launched in May, according to Ardel business development director Scott Clayton. Gibraltar-based STM Fidecs has begun setting up QROPS for US-bound individuals through its recently-launched Malta scheme.
Other companies, including Close, and at least one more that declined to be mentioned by name yet, are considering their options. “We are certainly looking at US QROPS – in fact we have gone quite far down the line with an outline plan for a product that holds water,” said Close Pension director Mike Lightfoot.
The difficulty, and a reason few companies have ventured into the market until now, Lightfoot added, is that “the US is probably the trickiest QROPS market to get right, as the tax issues associated with getting it wrong for US tax residents and nationals can be huge, and we see lots of US residents stumbling into unsuitable QROPS that will likely create tax issues for them at some point in the future”.
A common feature of many of the new schemes, particularly on Guernsey, is the use of deferred variable annuity products, created for them by life insurers, to roll up any internal gains until distribution.
Those involved in providing QROPS to Britons who are intending to settle in the US stress the importance of long-term planning, and the need to take their so-called tax-free lump sum out of the pension ahead of becoming US tax resident.
Explains Richard Newhams, senior adviser at Vie International, a London-based adviser: “I would tell people who are planning to move to the US to review their pension options six months to a year before they plan to go, not the month before.”
Maseco’s Sellon urges those planning a move to the US and considering a QROPS to get good professional advice from a neutral source first, since an individual’s circumstances can dictate whether a Guernsey or a Malta plan would be best. Not only would Malta be a better choice if there were a chance the individual might move on from the US at some point, but there are also asset allocation decisions to be made.
“For some, being taxed annually as a foreign grantor trust through a Guernsey structure, would actually make more sense than deferring tax; for others, the benefit of deferral is more appealing, and they might want to consider in this instance a Malta structure. Individuals should also take into account the fact that the QROPS trustee fee is going to be higher than the UK pension trustee fee.
“And it might not make sense for an American to transfer their UK pension, if they don’t have sufficient foreign tax credits to make use of, or if their UK pension is too small – for example, $25,000.”
