The UK scenario
One cannot access pension funds before the retirement age. It has to be either transferred to Qualified Recognised Overseas Pension Scheme (QROPS) in India or one can continue holding it till retirement in the UK.
After retirement, Indians can get it in the 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 2023, decided to transfer pension funds to India.
She discovered she can 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.
“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 lawyers but they are quite senior and don’t notarise the documents,” Roongta said.
“It is hard to explain to the UK insurer that inexperienced lawyers do it in India who may not appear convincing on the call due to language barrier, but 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.
Deepak Kumar, an independent consultant of overseas pension transfer, says UK-based pension providers try to discourage the transfer.
“Delays are quite common. When despite multiple follow-ups, we don’t get the 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 Deepak Kumar.
What if they hold it in the UK itself till retirement? The pension will get credited to the Indian bank account. People do not want to wait that long though.
“One never knows what may happen in the future. I do not want to take 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 Dhavnish Shukla (32).
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. It has to be withdrawn or held until the retirement age. Most people prefer to withdraw it.
Vamsidhar Atyam (46) first rolled over 401(k) funds into IRA because the latter gives more flexibility in choosing funds. He withdrew the amount in tranches.
“401k 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 401k 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 she is Resident but not Ordinarily Resident (RNOR) or Resident and Ordinarily Resident (ROR).
No tax is levied in India while the person is in 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 it, 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 CA Abhinav Gulechha.
“In case of a lump sum 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 Agreements,” says Gulechha.
Looking at it from the financial planning angle, if you have a financial goal that requires overseas investment, you will be better off leaving 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 registered investment advisor and founder, Sahaj Money Abhishek Kumar.
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 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, it will still be taxed in the US at a flat 30% rate, but there will be no penalty. “If you opt for Rule 21AAA election 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 lower of the India & 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 legal heirs,” says Deepak Kumar.
It is up to 40% in the US with a threshold 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.