Ask An Expert: How to Handle the Foreign Pension Limbo

By David Kuenzi, Thun Financial Advisors

Link to Original Article Published in Wall Street Journal Jan 8, 2015

Q: Reader Neill Clift of Washington, saying he and his wife are British immigrants with U.K. pensions from when they worked in that country, wrote that FinCen 114 and IRS Form 8938 filing obligations feel like “traps set for us and expect additional traps to be set. Is there any chance that the administration would allow foreign pensions to be moved into the U.S. to avoid all this risk? The block for such transfers is clearly on the part of the U.S. and we can move our pensions around in Europe and many other countries with ease (though with some expense).”

A: David Kuenzi of Thun Financial Advisors responds below. 

The good news is that U.S. residents with U.K. retirement accounts have relatively simple foreign asset reporting requirements. If threshold values are exceeded ($10,000 for FinCen 114 and $100,000 for IRS Form 8938 for U.S. residents, married filing jointly), both forms must be filed annually. However, these forms require little more than a statement of the value of the assets. Because the U.S.-U.K. double taxation treaty recognizes U.K. retirement plans as “qualified” in U.S. tax terms, the more complicated Passive Foreign Investment Company and Foreign Trust reporting rules do not apply.  This would not be the case of countries whose foreign pension accounts are not recognized by treaty as qualified or where no double taxation treaty exists at all.

The U.S. has never and is likely to never allow U.S. pension assets to be moved to non-U.S. pension plans or allow assets from foreign pension plans to be moved to U.S. pension accounts.  However, that does not make the U.S. the outlier. This is the norm around the world.  Pension assets are almost never portable across borders.

There are two notable exceptions. Firstly, the E.U. has created a pan-European regulatory framework to support the cross-border portability of pensions within Europe. Progress towards full integration within Europe is still halting, however, as the E.U. pension portability directives still conflict in many cases with local regulation and tax policy. The other notable example of cross-border pension portability is the U.K. QROP (Qualifying Recognized Overseas Pension Scheme). QROPs permit U.K. workers who accumulate assets in qualified U.K. pension plans to move these pension assets to special accounts maintained in a handful of foreign countries when those workers return to their home country or when British citizens emigrate permanently. Efforts by financial institutions to establish QROP accounts in the U.S. failed because the IRS refused to recognize them as qualified U.S. retirement accounts. This is unlikely to change.

I am very sympathetic to criticism that not enough has been done to facilitate the movement of pension assets across borders to match the global mobility of the modern work force.  However, the U.S. is not particularly behind the curve in this respect. The U.K. has been at the forefront of allowing it.  For U.S. residents with residual U.K pension assets, the most important aspect of the story is that the U.S.-U.K. double taxation treaty provides full recognition of a U.K. pension asset as qualified for U.S. tax purposes.  Therefore, there is no particular tax disadvantage to leaving these assets in the U.K. pension system until withdrawn during retirement. FinCen 114 and IRS Form 8938 forms will have to be filed in the meantime, however.

Mr. Kuenzi is the founding partner of Thun Financial Advisors, a U.S. investment firm based in Madison, WI, that provides investment management and financial planning services to Americans abroad.