Tax Implications For UK Pensions In The US
With over 700,000 British Expats living and retiring in the United States, one of the key issues encountered is the tax liability on UK pension income.
This article will delve into everything to do with the US UK tax treaty (double taxation), UK private pensions, workplace pensions and state pensions, and in particular how they are treated by the IRS and HMRC.
Taxable Income | UK Pensions In America
The first thing to understand, is that your UK and US retirement accounts should be viewed as separate assets. HMRC does not deem IRA accounts (or Roth IRAs, 401K) as a similar structure as UK pensions. As such, they cannot be combined together.
The tax you pay on UK pensions in the US will depend on your total taxable US income as per local tax laws on foreign pensions.
Understanding Your UK Pension Treatment In The United States
A UK pension pot consists of 2 separate parts. The first is your pension commencement lump sum (PCLS). This is a 25% tax free cash payment (tax-free in the UK). It does not have to be taken all at once, and can be taken in multiple intervals if you so please.
The remaining 75% of your pension scheme will be treated as income tax, subject to your country of residence and relevant double taxation agreements.
Is The 25% Tax Free Cash Pension Payment Tax-Free In The US?
The PCLS tax-free cash payment is tax-free in the UK. It is not necessarily tax-free in the US. This is a very grey area, and seems to be deliberately vague in the US tax code, along with all relevant double taxation agreements on foreign pension income.
Whilst your UK pension will always pay this portion of your pension income out tax-free (even as a US resident) we suggest engaging with a local tax adviser to provide an expert tax opinion and peace of mind on how you should declare this money.
How Is The Rest Of My Pension Income Taxed In The US?
The remaining 75% of your 'crystallised' UK pension pot will be classed as taxable income in the United States. This will be subject, and additional to your marginal rate of tax.
For example, if you declare $100,000 in income for a given reporting period, your federal tax rate will be 24% for a single tax payer. However, if you then proceed to take the GBP equivalent of $100,000 from your UK pension in this tax year, you will be pushed into a new tax bracket of 32%.
Make sure you are fully aware of the consequences when taking any foreign sourced income as a US citizen, as this can alter your financial strategy.
Getting An NT Code In The US | Code NT For US Residents
Importantly, note that the 75% income element of your UK pension pots will still be taxed at source by the UK government, and they will typically apply an emergency tax rate (which is punitive) on any draw-downs above the personal allowance.
It is your responsibility to inform HMRC that you are a US tax resident, and have the relevant Nil-Tax Code applied to your UK pensions as a US resident. The form can be found below:
Double Taxation Convention - UK Residents In The United States
The NT Code signals to HMRC that any proceeds paid from any given pension pot should be paid out gross (i.e. free of any UK taxation). You will then receive benefits to your account, and declare these as income in the United States under US income tax rates (worldwide income reporting requirements). Note, the above does not cover state pension provisions.
To successfully apply for an NT Code, you will need your relevant personal information, pension scheme information and references. Once completed, you can send the form to HMRC to process. Note, our advisers can assist clients with this procedure, as well as completing 'dummy' or 'test' income payments to make sure the tax code has been correctly applied by HMRC. Failing to do so may result in you being taxed at the emergency tax rate, which can take some time to reclaim (anywhere between 1-3 months at the time of writing).
SIPP For US Residents | The Best Pension For Expats In The US?
The International SIPP, or US SIPP, is a particular type of UK pension scheme created for British Expats who live abroad. The benefits of transferring and consolidating your UK pensions into one, easily managed SIPP can be huge as you enter retirement across the pond. Below we list the key features of the US SIPP, and how it can help British Retirees in the US:
Full-flexible access draw-down, meaning you can take as much of your money out, whenever you want. Most traditional UK providers (Scottish Widows, Aegon, Aviva etc.) have very limited income options for US residents, and typically require policyholders to purchase an annuity or transfer out to a new scheme. If you fall into this position, an International SIPP is worth considering
Ability to pay out to any bank account in the world (providing it is in your name). This means you can have pension income and benefits paid into your US bank account, if you have closed all of your UK bank accounts.
Full control of investment management, with bespoke solutions. UK pension providers will typically have your funds invested in their off the shelf, model portfolios, which are quite expensive (usually 1% a year in fund fees), as well as under-performing simple tracker funds. With the US resident SIPP, together with your expat financial adviser, you can create a low cost, growth oriented portfolio with focus on the US (for example, an S&P 500 tracker from Vanguard).
The option to hold your pension fund in USD, hence protecting yourself from local currency risk and the volatile value of the pound sterling, particularly relevant with fiscal changes relating to th new governments policies.
Independent Pension Transfer Advice For US Residents
The Wealth Genesis is classed as a fiduciary, meaning we only act in the best interests of our clients. We charge a flat, one-off initial advice fee, regardless of the value or the number of pensions being transferred.
All our SEC regulated advisers are dual qualified, holding US and UK financial advice qualifications, ensuring the advice you receive is as appropriate as possible, whilst factoring in cross-border concerns.
To understand how we can help secure your retirement, and help your pensions grow in a low cost account, schedule an initial discovery meeting with a member of our team using the diary below.
FAQs
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UK based financial advisers will be licensed to provide retirement advice to UK residents only.
If you live in the United States, you will need to engage with an SEC regulated financial advice firm, such as ourselves. All our licensing permissions can be found on the footer of our website.
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We charge a flat-fee of £3,000, due upon completion. This can be deducted from your pot if preferable once transferred.
We do not charge any commissions or hidden fees. -
The answer depends on what your existing UK pensions can give you as a US resident.
If they are happy to pay you your pension money as and when you wish, and you are happy with the investment performance, then there is no pressing need to transfer, and you can leave your UK pensions as they are. -
Once all necessary documentation has been completed, the transfer typically takes between 1-3 months to complete from submission.
