There are thought to be over 600,000 British citizens now living in the US. There are also hundreds of thousands of US citizens who have worked in the UK at some point and are now back living in the US or elsewhere in the world.
These two groups will both have one issue in common; what to do with their UK pension benefits. Anyone who has worked in the UK will normally have built up some form of pension benefits and it's now compulsory by law for all employers in the UK to enrol their employees into a workplace pension scheme.
This means when people leave the UK, they will need to decide what to do with their UK pension.
Transfer a UK pension
The money held in a UK pension scheme can be transferred to another pension scheme in the UK, or certain overseas pension schemes. Transferring your pension between UK pension schemes is usually a relatively easy process and enables people to transfer and combine multiple pensions into one easy to manage pension such a SIPP.
You can transfer your pension to an overseas pension scheme if the receiving scheme meets a number of criteria specified by HMRC in the UK.
QROPS in the US
You can only transfer your UK pension to a retirement plan or pension in the US as long as the receiving arrangement has QROPS status. You won't be able to transfer your pension to a 401k.
A qualifying recognised overseas pension scheme or QROPS for short, is an overseas pension scheme that the UK recognises as eligible to receive transfers from registered pension schemes in the UK.
To qualify as a QROPS the scheme must meet the requirements set by UK tax law. To check if a pension is a QROPS you can check the list of schemes that have told HM Revenue and Customs (HMRC) that they meet the conditions to be a recognised overseas pension scheme (ROPS). As of 23 August 2021, there are no QROPS registered in the USA.
Can a US resident or US citizen open a SIPP?
US residents and US citizens can open a MyExpatSIPP and transfer their existing UK pensions. A SIPP is a type of UK pension plan that provides you with increased control, flexibility and withdrawal options compared to a standard employer pension plan.
MyExpatSIPP allows you to manage your pension from your online account, meaning there’s no paperwork to send back and forth to the UK. You will be able to check the value of your pension, see any transactions and all correspondence is stored on the online account.
You can choose your own investments from a wide range of Shares, ETFs and Mutual Funds in multiple currencies with online dealing. If you don't want to worry about managing your investments and would rather leave it to the experts, there are three ready-made investment portfolios, with funds managed by Vanguard and BlackRock, two of the world's largest investment managers.
Drawing your UK Pension
You are able to start taking withdrawals from your SIPP once you reach age 55. New rules implemented in April 2015, known as “pension freedoms”, meaning there are no limits to how much you can withdraw from your pension, and there is no longer a requirement to use your pension fund to purchase an annuity.
You can take up to 25% of your pension tax free, either as one lump sum or gradually over time through multiple withdrawals.
The remaining 75% is treated as income and usually subject to income tax. This can also be withdrawn as lump sums, or gradually over time as your regular income in retirement, or not at all. There is no requirement to draw your pension at all.
Tax treatment in the US
The double taxation agreement between the US and the UK states that:
“1. (a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.
(b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first mentioned State.
2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.”
This effectively means that UK pensions paid to US residents will be taxable in the US. Furthermore, our understanding is that the 25% tax free lump would also remain tax free in the US: https://www.castroandco.com/blog/2018/february/u-s-tax-treatment-of-uk-pension-distributions/
You can read Articles 17 & 18 of the tax treaty in full as these are the sections that relate to pensions.
A UK pension scheme will tax the withdrawals from your pension as if you’re a UK resident. You will need to inform HMRC in the UK that you are no longer resident and you would like your UK pension to be paid without the deduction of UK tax.
You can do this by completing the specific DT Individual form which we can assist you with.
As it’s likely you won’t be able to transfer your pension to a Retirement Plan in the US, given the lack of suitable QROPS, you can still stay in control of your pension once you leave the UK.
If you're looking to take control of your pension in the UK, transfer your pension to a SIPP account with MyExpatSIPP and manage your pension online.
We provide you with all the resources, information and guidance to enable you to stay in control of your pension and manage it online from anywhere in the world.