US Tax On UK Pension | US Resident Guide
LEARNING OBJECTIVES
We provide relevant, high quality and up-to-date information to British Expats in the USA.
IN THIS ARTICLE, YOU WILL LEARN THE FOLLOWING:
The different types of UK pension payments
How UK pension income is taxed in the US
The tax treatment of the lump sum payment
Key benefits of transferring your UK pension to a US SIPP
This guide is designed for individuals residing in the US who have UK pension plans.
Understanding how your UK pension benefits are taxed in the US is a matter which is commonly misunderstood by British Expats and US residents. This guide will delve into the taxation of your UK retirement plans and foreign pensions.
The first step is to understand the different types of pension payment from UK providers. This includes pension as income, your pension commencement lump sum (PCLS), and of course the UK state pension from the UK government.
You then need to understand the double-taxation agreement between the UK and the US, and ensure that you hold the relevant tax code of Nil-Tax (NT Code) to receive pension benefits in the United States free of UK taxation.
US Tax On UK Pension Income
Simply put, income payments from your UK pension scheme will be treated as taxable income in the US, which is added to your marginal rate of income tax.
As an example, if you earn $70,000 per annum in the US, and you take a pension payment of £10,000 from your UK pension provider, this will be added to your income and taxed at the current tax bracket of 22%.
Note, that taking larger payments can push you into a higher tax bracket if you aren't careful. Be sure to speak with an adviser to maximise your tax-efficiency.
US Tax On Pension Lump Sum
The PCLS 25% tax-free cash payment is tax-free in the UK, not other countries. A very common misconception is that this payment is always tax-free in the US. It is not.
The PCLS payment is an additional benefit and incentive for UK residents to plan for retirement and maximise their provisions, so as to rely less on the state. Individuals in the UK who invest in pension plans receive tax-deductions on the contributions, as well as tax-benefits on receipt.
Note, all UK pension providers will still pay out the 25% pension lump sum payment to US residents by default. No tax will be deducted at source. It is then up to the individual to declare this payment and pay the relevant local and federal taxes in the USA. Be sure to consult a local tax-adviser to understand the exact treatment of this payment
Is The UK State Pension Taxable In The US?
As per the previous 'pension income' rules, these payments will be taxable in the US, not in the UK.
These state pension payments can be paid into your account. They will need to be declared locally.
Transfer UK Pension To US
The biggest issue for US residents is that the overwhelming majority of UK pension providers will no longer offer flexible access draw-down to Non-UK residents, i.e. they will not be able to take their pension income as and when they want it.
This means that the only option is to take the pension as a lump sum. Naturally, this could trigger a huge tax-liability in the US, given most pension pots are valued over £100,000.
If your pension provider in the UK does not offer you the option of full flexibility or multi-currency, it would be wise to explore your options and transfer your UK pension to a pot that is purpose built for US residents, such as an International SIPP, or Non-Resident SIPP.
International SIPP For US Residents
You can consolidate, transfer and combine all of your UK pension pots into one manageable scheme known as the International SIPP (self-invested personal pension scheme).
By transferring into the US SIPP, American residents can take advantage of the following features:
Full-flexible access draw-down in retirement, allowing you to control how and when you take money and manage your retirement in the most tax-efficient way possible
Invest and hold your pension pot in USD, mitigating the currency risk exposure
Control your investments in line with your attitude to risk and individual goals
Benefit from professional management at a low cost
Gain access to low-cost ETFs and mutual funds that are diversified with US exposure
Expat Pension Transfer | The Wealth Genesis
The Wealth Genesis is fully regulated by the SEC to provide pension planning and retirement advice to US residents.
Our expert advisers are fully qualified to provide advice both in the UK and the US, positioning us to deliver positive outcomes for your cross-border pension accounts.
We charge a one off flat-fee for all our UK to US pension transfers, with zero commissions or conflicts of interest. Our completely independent status ensures our fiduciary status is to act solely for our clients.
To discover how we can assist with your retirement in the US, schedule an initial consultation using the button below.
FAQs
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Taxation is complicated, and different advisers will state different opinions depending on their jurisidiction.
We encourage all clients to take local tax-advice in their state. -
Simply put, the cost and time taken dealing with international residents has become cumbersome.
Furthermore, UK financial advisers and providers do not hold SEC licenses to provide financial advice to US residents. -
Most advisers charge between 1% and 5% based on the total pension value.
We charge a flat-fee of £3,000 for all UK pension transfers, regardless of the quantity or value of the pensions in question.
