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Pension Advice For Expats In Usa
If you have a connection with the USA, have a BRITISH pension, QROPS or have been advised to take out an Investment Bond or wish to receive high quality investment advice taking into account Double Tax Treaties, then we are able to assist you.
For many expats who have lived in the USA there are key issues or concerns which are summarised by us below, with some pointers as to how you can avoid the mistakes that we commonly see, and consider the things that make a difference to every USA expat.
We regularly blog on the latest matters affecting you, and within these pages we have put together USA specific pension information for expats. We also focus on the main tax considerations for British pensions and investments connected with US expats, and then go on to discuss specific investment strategies including the pros and cons of investment bonds, SIPPs and QROPS.
KEY POINT: British pensions for residents in the USA should not be transferred under any circumstances to QROPS or International SIPP (link to article) as the transfer is non-qualifying for roll-up relief and will be subject to future taxation. If it is left in the British then it will continue to qualify under British rules for gross roll-up relief.
KEY POINT: Trusts do not exist under USA civil law. However, trusts governed by foreign law are generally analysed by applying conflict of law rules. As a result, in USA, trusts can be subject to both income tax and gratuitous transfer taxes. Some pensions are regarded as Trusts!
USA Tax considerations
USA only recognises investments, investment providers and insurance products that are registered to be sold in USA. There is a suggestion that the sale of non-compliant insurance bonds (whether outside a pension or not) will not enjoy any tax benefits and should be declared on tax returns, but certainly non-regulated investments do not come under any form of protection and will incur further tax and will require an accountant to review.
KEY POINT: Trusts do not exist under USA civil law. However, trusts governed by foreign law are generally analysed by applying conflict of law rules. As a result, in USA, trusts can be subject to both income tax and gratuitous transfer taxes.
The legal and tax consequences of a foreign trust are complex and uncertain. Case law is scarce. For an expat living in USA, or returning to the British they have to consider personalised bond rules to avoid taxation in the UK, and they have to consider trust implications and income tax in USA.
KEY POINT: For those expats who were advised to take out a trust in the BRITISH and put the investment into an Investment Bond for tax efficiency reasons – you must review this arrangement through a combined British and USA wealth adviser who has Inheritance Tax specialities (such as ourselves), especially if the expat intends to return to the UK.
There is a saying ‘Don’t let the tax tail wag the investment dog’. Investors should be interested in the best strategy to get the highest net return after tax AND fees.
KEY POINT: If the fees for a tax strategy are higher than the tax saved, then it would be sensible to look at taxed options with lower fees. When we review existing products often recommended in USA by expat British advisers, we discover in 95% of cases that the clients would have been better off not taking out the supposedly “tax-efficient” investment bond!
The adviser should look at alternative strategies, suggest options to discuss with you, finalising a best solution for you, the client, based on investment, fees and the overall tax liability.
KEY POINT: Investments not regulated under USA rules will not be considered or protected by any local regulators. If these investments go bust then the client will lose all their money and have no protection.
Key issues / concerns
Trusts do not exist under USA civil law. However, trusts governed by foreign law are generally analysed by applying conflict of law rules. As a result, in USA, trusts can be subject to both income tax and gratuitous transfer taxes.
Investments not regulated under USA rules will not be considered or protected by any local regulators. If these investments go bust then the client will lose all their money and have no protection.
QROPS or International SIPP, are to be avoided.
British, Cayman island or EU based Investment bonds, especially when sold in a QROPS or International SIPP, are to be avoided.
The main consideration should be the balancing of tax efficient advice which takes into account future plans, and charges of products.
The vast majority of expat advisers (differ from regulated USA advisers), providing investment or pension investment advice to British expats, do not have investment licences and are circumventing this by operating outside the country and selling insurance wrappers that are expensive and commission laden.
What should you be considering?
If you are confident enough, then do your research, and place investment directly.
If you need assistance, then seek advisers who are regulated themselves in the UK for pensions advice, and / or regulated for INVESTMENT advice in USA.
Consider not only tax efficiency, but also costs!
Point 4 – is, make sure the costs are accurate! If you are told the costs are 1% or 1.5% per annum in total and there is no fee up front, then you are probably being lied to in 95% of cases.
Some advisers, providing investment or pension investment advice, do not have investment licences and are circumventing this by selling insurance wrappers (investment bonds) that are expensive and commission laden.
Don’t get taken in by the great claims over QROPS and Insurance bonds or investment platforms that are really investment bonds. These add layered charges and are usually not the best outcome for clients (although we accept that in around 15% of cases they are).
Don’t be a sheep. Just because your best friend was advised to do something, never assume this is the right thing. Each person is an individual and requires individual solutions. If your friend were to walk off a cliff, would you follow them?
Our Empirical evidence from clients we have spoken has shown us that many expat sales advisers in USA (who often do not live there), just sell a product to their clients for commission and do not provided financial solutions. The product is often a QROPS or an International SIPP or an investment bond, which probably will not be best advice but this is not really considered. Don’t listen as 99% of the time you would be better off doing something else with your hard earned money or pension.
Nothing on this page or website should be construed as personal tax advice in the USA or the UK. We are not tax advisors and not regulated as such but we do understand taxation of pension funds in the UK.
We co-operate with a regulated US advisor who can provide you with the advice aspects with respect to US including the tax issues of a British pension. This website is not aimed at US resident individuals. However, if you are a US citizen seeking advice on British pension we are legally able to provide the advice you seek but you will not be covered by the Financial Ombudsman Service in the UK. We apply the same high standards of advice to your pension as we would if you were in the UK, but we are effectively giving advice at arm’s length to you, and you would have to accept this.
Trading Names: TailorMade is a registered trading name, but does not provide expat pension advice in that name.
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