How to transfer or withdraw private pension plans from the UK, US

One risk, however, for keeping money abroad is inheritance tax. (Image: Pixabay)
One risk, however, for keeping money abroad is inheritance tax. (Image: Pixabay)


  • One cannot access pension funds before the retirement age in the UK
  • In the US, it has to be withdrawn or held until the retirement age

Several Indians working abroad contribute to private pension plans provided by employers such as the 401(k) in the US. But what happens when they decide to return to India? They have a choice whether to hold it in the same country till retirement, transfer it to their home country or simply withdraw it prematurely. But the rules vary by country. Mint takes a closer look at what they are in the UK and the US.

View Full Image

The UK scenario

One cannot access pension funds in the UK before retirement age. It has to be either transferred to a qualifying recognized overseas pension scheme (QROPS) in India or one can continue holding it till retirement in the UK.

After retirement, Indians can receive this in a specified bank account in India. In case of transfer, it is important to choose a QROPS approved by His Majesty’s Revenue & Customs (HMRC), the national taxing authority of the UK. The list of approved schemes can be readily found on their website.

Akshara Roongta, 28, who worked in the UK for two years before returning to Mumbai in December, decided to transfer her pension funds to India. She discovered she could apply for the transfer only after receiving the last paycheque. She did that before coming to India, but four months on, the transfer is yet to happen.

View Full Image

“Their document verification process is quite stringent. I was told to certify all documents by a lawyer. They shared a list of lawyers whom they trust. I spoke to almost all the lawyers, but they are quite senior and don’t notarize the documents," Roongta said.

“It is hard to explain to the UK insurer that inexperienced lawyers who do it in India may not appear convincing on a call due to the language barrier, but they are very much credible," she says.

Strangely, her husband, who worked with one of the group companies of the UK pension provider, could transfer his pension following the same procedure.

Also Read: Tax mistakes NRIs are making when selling property in India

Deepak Kumar, an independent consultant on overseas pension transfers, says UK-based pension providers try to discourage transfers.

“Delays are quite common. When, despite multiple follow-ups, we don’t get an answer, I tell my clients to file a complaint. One of my clients had to write to the legal team of the pension provider before his funds could get transferred," says Kumar.

When one holds the fund in the UK itself till retirement, the pension will get credited to the Indian bank account. But people usually do not want to wait that long.

“One never knows what may happen in the future. I do not want to take a currency or country risk. Moreover, in the UK, they invest retirement money in all sorts of securities including private equity. I want to park my pension funds in stable instruments," says 32-year-old Dhavnish Shukla.

The US scenario

The US has primarily three types of private pension plans:

  • 401(k), an employer-sponsored retirement plan
  • An individual retirement account (IRA)
  • Roth IRA in which contributions happen after deducting taxes

Unlike the UK, funds from 401(k), IRA or Roth IRA cannot be transferred. They have to be withdrawn or held until retirement age. Most people prefer withdrawal.

View Full Image

Vamsidhar Atyam, 46, first rolled over his 401(k) funds into IRA because the latter gives more flexibility in choosing funds. He withdrew the amount in tranches.

“401(k) levies administration charges which were borne by my employer when I was working in the US. After I resigned, I had a choice to continue with my 401(k) plan as it is but pay those charges out of my pocket or roll it over into an IRA which didn’t have that overhead," he says.

However, withdrawal before retirement attracts a 10% penalty except in situations such as medical expenses or first home purchase. The tax liability depends on the person’s residency status in India—whether they are ‘resident but not ordinarily resident’ (RNOR) or ‘resident and ordinarily resident’ (ROR).

No tax is levied in India while the person has RNOR status. This status can last up to three years after returning to India. In case of ROR status, while the tax could be withheld in the US, one can claim the tax credit.

If one has to withdraw the funds, tax experts advise doing it while RNOR status is active.

“Keep a US bank account active after returning from the US and receive the withdrawal in that account. Remit it later to the Indian bank account," says chartered accountant Abhinav Gulechha.

“In case of a lumpsum withdrawal after returning from the US and becoming a non-resident alien for US tax purposes, there will be a flat 30% tax deduction along with 10% early withdrawal penalty (if withdrawing before age 59.5 years). In certain limited cases pertaining to 401(k), periodic monthly payments may be opted whereby the payments are taxable only in India (and not the US) as per Article 20(1) of India-US DTAA (double taxation avoidance agreement)," says Gulechha.

Also Read: Unlocking tax benefits for NRIs

Looking at it from the financial planning angle, if you have a financial goal that requires overseas investment, you will be better off leaving the funds as is.

“If one does not need money on an immediate basis and the corpus is not a big chunk of their investment portfolio, then they could let it remain that way till their expected retirement year," says Abhishek Kumar, a registered investment advisor and founder of Sahaj Money.

This is exactly what Palak Chauhan, who worked in the US for 10 years, did. “My investments in 401(k) and Roth IRA are for servicing my long-term retirement goals. Moreover, I want to continue my exposure to the US market," she says.

One can also link their children’s foreign education goals with such funds. “Withdraw the required amount close to the goal instead of bringing it back to India immediately. This might be a good way to diversify the portfolio and hedge it against country and currency risk," Kumar says.

If you keep the 401(k) or traditional IRA funds as is and withdraw after age 59.5, they will still be taxed in the US at a flat 30% rate, but there will be no penalty. “If you opt for Rule 21AAA and Form 10EE for these funds in India, the income component in the withdrawal will be taxed in India only in the year of withdrawal. You can claim credit for US taxes in India at a lower threshold between India and the US tax rate on the income component of the withdrawal," he added.

One risk, however, for keeping money abroad is inheritance tax. “What is often ignored is the death scenario. What if the person dies? A good chunk of money will get deducted as inheritance tax before it goes to the legal heirs," says Kumar.

Inheritance tax is up to 40% in the US with athreshold of $60,000 for non-residents. It can go as high as 55% in the UK in some scenarios. Hence, figure out your needs and take action accordingly.

Also Read: Do NRI marriages abroad impact succession rights in India?

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.