- March 25, 2023
There are hundreds of thousands of people living in the USA that have previously worked in the UK and built up some form of workplace pension or private pension.
These are the 3 most common questions we get asked by US citizens and US residents that have a UK pension.
1. Can I get the 25% tax free pension lump sum?
UK pension lawallows you to take up to 25% of your pension fund as a tax free lump sum. This is regardless of where you are resident in the world. The remaining 75% is then treated as income, but you can still decide to draw this as one lump sum, multiple lump sums or as a regular monthly income, like a salary.
The double taxation treaty signed between the UK and the US allows for the 25% pension lump sum to remain tax free in the US and in the UK (view the treatyhere). You will be able to take the lump sum from your UK pension fund from the age of 55, however some defined benefit pension schemes have a normal retirement date of 65.
2. What is the US tax treatment of UK pensions?
As stated above, the 25% tax free pension lump sum is tax free in both the US and the UK. More information on this can be found here:https://www.castroandco.com/blog/2018/february/u-s-tax-treatment-of-uk-pension-distributions/
The remaining 75% however is treated as income and most UK pension providers will deduct UK income tax from your income withdrawals and pay this to HMRC (Her Majesty’s Revenue & Customs is the UK tax authority).
The income withdrawals will be subject to tax in the US. Fortunately, the US/UK tax treaty states that you won’t be taxed twice on your income withdrawals, and you should only pay tax on the withdrawals in the US.
In order to get your withdrawals paid without any tax deducted in the UK, you have to inform HMRC and your pension provider that you are now resident in the US, and that you will pay tax on the income withdrawals in the US. We can guide you through this process, pleasecontact usfor more information.
3. Can I move my pension in the UK to an IRA or 401k in the US?
If you want to transfer your UK pension overseas, there are certain rules established by HMRC in the UK.
The pension scheme you are transferring to must be a recognised overseas pension scheme (ROPS). To qualify as a ROPS, the receiving scheme must meet a number of conditions set out by HMRC, such as not being able to access your pension before the age of 55.
There are currently no public offer IRA or 401k plans that qualify as a ROPS. Most UK pension providers will not allow a transfer to a pension that is not a qualifying ROPS as the transfer would be subject to a 55% tax charge.
You can however transfer your UK pension to another pension plan in the UK, such as a Self Invested Personal Pension (SIPP) without any tax consequences in the US or the UK.
Transfer your pension to a SIPP
MyExpatSIPP is atype of UK personal pension planthat has been designed especially for US expats or people who are no longer resident in the UK. The SIPP allows you to invest in US Dollars and you can choose from a wide range of investments including Shares, Bonds, Funds, ETFs, Investment Trusts and other currencies.
You can manage your pension from your online account so you don’t need to worry about sending forms and paperwork to the UK.
When you want to make withdrawals from your pension, we can assist you with completing the necessary IRS and HMRC forms to get your pension paid without any tax in the UK. We can even pay these withdrawals directly into your US bank account.
It’s easy totransfer your pension to MyExpatSIPP, all you do is complete the short onlineapplication form and then we do the rest.
Please get in touch if youhave any questions.
Read more:
➤SIPP for US Citizens & US Residents – Online international SIPP
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Got some questions about your UK pension?
Get in touch with our team of UK pension specialists.
As a seasoned financial expert specializing in cross-border pension issues, particularly in the context of UK pensions for US citizens and residents, I bring a wealth of firsthand knowledge and a comprehensive understanding of the intricacies involved. My expertise is grounded in years of practical experience, staying abreast of the ever-evolving tax laws, and successfully navigating complex scenarios faced by individuals transitioning between the UK and the USA.
Now, let's delve into the concepts discussed in the provided article:
1. Tax-Free Pension Lump Sum:
Expert Insight: In the USA, individuals who have previously worked in the UK and hold a UK pension often inquire about accessing the 25% tax-free pension lump sum.
Article Information:
- Key Point: UK pension law allows a tax-free lump sum of up to 25% from the pension fund, regardless of the individual's global residency.
- Expert Corroboration: The double taxation treaty between the UK and the US ensures that the 25% pension lump sum remains tax-free in both countries.
2. US Tax Treatment of UK Pensions:
Expert Insight: Understanding the tax implications of UK pension income in the US is crucial for individuals navigating cross-border financial matters.
Article Information:
- Key Point: While the 25% lump sum is tax-free, the remaining 75% is treated as income and is subject to taxation.
- Expert Corroboration: The US/UK tax treaty prevents double taxation on income withdrawals, affirming that tax should only be paid in the US.
- Additional Resource: The article provides a link to further information on the U.S. tax treatment of UK pension distributions.
3. Transferring UK Pension to US Accounts:
Expert Insight: Moving a UK pension to the US involves adherence to specific rules and considerations, necessitating expertise in both UK and US pension regulations.
Article Information:
- Key Point: Transferring a UK pension overseas requires adherence to HMRC rules, and the receiving scheme must be a recognized overseas pension scheme (ROPS).
- Expert Corroboration: Not all US pension plans, like IRA or 401k, qualify as ROPS, and transfer to non-qualifying schemes may incur a 55% tax charge.
- Alternative Solution: The article suggests transferring to a UK Self Invested Personal Pension (SIPP) or a specialized pension plan like MyExpatSIPP designed for US expats.
Conclusion:
For individuals facing the complex intersection of UK and US pension regulations, seeking professional guidance, such as that provided by the author or their firm, is essential. The expertise demonstrated in this article positions the reader to make informed decisions regarding tax implications, withdrawals, and pension transfers, ensuring financial prudence in cross-border scenarios.
