Is My UK Pension Taxable In The US?

LEARNING OBJECTIVES

We’re passionate about providing high quality, relevant and up-to-date financial information to British Expats in the US.

IN THIS ARTICLE, YOU WILL LEARN THE FOLLOWING:

How a UK pension is treated in the US
The tax due on the PCLS income payment
Reasons to consider a UK to US transfer
Why you can’t transfer to an IRA or 401K

With over 700,000 British Expats living in the United States, one of the most common queries is related to the taxation of UK pensions.

Given UK pension pots can form a very large part of your international retirement, understanding how these plans integrate into the US tax system is vital.

US Tax On UK Pensions

The first thing to understand is that all pension income in both the US and the UK is treated as taxable income (not capital gains), with the exception of the Roth IRA.

Benefits taken from a UK pension will be taxed at your marginal rate of income tax in the US. So, for example, if your annual US income is $100,000 and you take an additional payment of £20,000 from a UK pension pot, this will be added to your total income and federal income tax of 24% will be levied.

Note, always plan carefully as taking too much income from a UK pension can push you into a higher marginal tax bracket.

UK US Dual Taxation Agreement

The UK and the US have a dual taxation agreement in effect. This protects citizens from being taxed in both countries of residence. So, by this logic, if you pay UK tax on your UK pensions as a US national, you do not need to pay US income tax, and vice versa.

The Importance of The Nil Tax Code (NT Code for US Residents)

As a rule of thumb, UK pension providers will deduct UK tax at source, i.e. at the time you take the payment. Typically, if HMRC does not hold an NT code on your file, emergency tax will be applied at the time of the withdrawal. It can then take several months to claim the tax back from HMRC.

If you wish to pay US tax on your UK pensions, be sure to have an NT code in place for all pension payments. This can done through the use of an International SIPP account (SIPP for US residents). Having the NT code in place means that all income payments from your UK pension pot will be paid gross, i.e. zero UK tax deductions.

Can I Transfer My UK Pension To The US?

You cannot directly transfer your UK pension to the US, however you can transfer and consolidate your UK pots into an International SIPP, or commonly known as a US resident SIPP.

By utilising this account, you gain full control of your UK pension schemes with a US perspective in mind. This means you can continue to actively manage your investments, hold your accounts in USD, be paid into US bank accounts, as well as having zero UK tax deducted from your payments.

You can learn more about the US SIPP for US residents in our guide here.

Can I Transfer My UK Pension to IRA?

As per the above, there is no option to transfer your UK pension scheme to an individual retirement account in the US.

Can I Transfer My UK Pension to 401k?

Unfortunately this is also not possible. UK and US pension laws operate under different rules and legislation. As such, whilst both being 'retirement accounts', they are not deemed like-for-like.

Is The Tax Free Lump Sum Tax Free In The US?

Whilst there is a UK tax treaty with the US, this is in place for regular income payments. The 25% PCLS payment is tax-free in the UK, not necessarily in the US.

Be sure to speak to a regulated tax adviser in your state to fully understand the treatment of this unique pension payment. The PCLS payment is generally quite large, and as such failing to understand the tax treatment can result in a large tax-bill.

The SIPP For US Residents

For the vast majority of British Expats in the US, the best retirement solution is to consider a US SIPP (self-invested personal pension).

By consolidating and transferring your pensions to this expat-specific account, you gain access to an array of benefits that are not available with traditional UK pension providers such as Aviva, Aegon, Scottish Widows etc.

UK Expat Financial Advice With The Wealth Genesis

The Wealth Genesis is fully regulated by the SEC to provide financial advice to US residents on their UK assets.

All our US advisers are qualified in both the UK and the US to provide the most appropriate advice to our clients. We understand the implications of retiring abroad, and our cross-border specialists can help to implement and secure your international retirement.

We charge a flat-fee for all our independent advice, regardless of your wealth, circumstances or objectives. We also charge an industry leading annual management fee, helping our client portfolios go further.

To understand how we can help, get started with us today using the button below.

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FAQs

Most advisers charge between 1% and 5% for the initial pension transfer, and 1% per annum.
At The Wealth Genesis, we charge a flat-fee of £3,000 and 0.85% per annum.
The whole process typically takes between 1 and 3 months.
Not necessarily. If your UK provider is prepared to allow you to manage the investments, invest in USD, and pay out to international bank accounts, then there may be no need to transfer.

If they cannot offer these benefits, you should consider moving your pensions.