If you’re a UK expat, you may well have built a substantial pension fund – either through employer arrangements or your own personal plan – before you made the move to the US.

In fact, your accrued fund may be one of your most substantial financial assets.

Because of this, it makes sense to proactively manage it. It would also be understandable if you wanted to consider transferring your UK-based retirement savings to sit alongside your other US-based financial accounts.

Indeed, one of the most common questions we are asked is whether it is possible to bring UK pensions into the US and deposit them into a US arrangement, such as a 401(k), an IRA, or a Roth IRA.

We looked at this issue in some detail in a recent Ask An Expert podcast with Holly Caulder, a partner at Buzzacott, and we would recommend that you check it out.

In this article, you can find out if a transfer is possible and what your options are.

Direct transfers from UK to US arrangements are generally not allowed

We’ll get the bad news out of the way first.

In our professional opinion, US and UK regulations do not allow for a direct tax-free transfer from a UK pension to a US arrangement.

Because of that, in nearly all cases, we would advise against it.

This is primarily down to the fact that the IRS will not allow transfers from an overseas pension arrangement into a US retirement scheme.

However, this should not detract from the fact that it’s still sensible to proactively manage your UK pension funds.

There are three important reasons for this:

  1. Failure to adhere to strict IRS reporting requirements on UK-based pension assets can result in legal issues, substantial tax charges, and other penalties.
  2. Although you may not be able to directly transfer your UK funds, there are other options to consider, based on your future plans and financial arrangements.
  3. Your accrued UK pension funds are likely to form an important part of your retirement income and tax planning.

Let’s take those three points in order.

1. You need to be aware of the IRS reporting requirements on your UK pension assets

It’s important to bear in mind that you need to include your UK pension funds in your US tax returns annually.

As they are deemed foreign assets, subject to certain minimum values, you should complete Form 8938for each arrangement and also report them on the FBAR (FinCEN Form 114).

Any investment growth in the value of your funds is treated as income. As a result, you should also complete Form 8833, which will ensure that the growth is exempt from US tax under the terms of the UK/US Tax Treaty.

You should also be aware that state taxes may apply to your UK pension assets; understanding these rules is vital to mitigating costs where possible.

2. It may be advantageous to consolidate your UK pensions into an International SIPP

You usually can’t access your UK pension fund until you are 55, rising to 57 in 2028.

In the meantime, your funds should form an important part of your financial planning.

One option we often recommend is consolidating all your UK-based defined contribution pension arrangements into an International SIPP (self-invested personal pension) designed for UK citizens living or working overseas.

Importantly, these provide access to features such as global investment options and the ability to hold assets in US dollars (USD), which can be highly advantageous for UK expats.

By consolidating all your UK pensions into an International SIPP, you may benefit from:

  • Having all your assets in a single arrangement, rather than a series of different plans
  • Reduced currency risk, as assets can be held in US dollars
  • Ability to receive certain withdrawals in USD
  • Simplified IRS reporting requirements once your single plan is set up.

The IRS could deem a transfer from an employer scheme to a SIPP to be a taxable event. So, you will need to complete Form 8833 to apply for a tax treaty exemption.

Once your International SIPP is set up, you will likely need to file Forms 3520 and Substiture-3520A with your annual tax return to the IRS.

Transferring your existing pensions can be highly complex, and transferring to a SIPP may sometimes not be the right course of action. As a result, we would strongly recommend you get expert advice on pension and taxation issues.

3. It is important you understand the tax issues around drawing from your UK funds as an expat in the US

As you have already read, you can currently start accessing your UK-based pension funds from 55, rising to 57 from 2028.

It’s possible that your accrued UK pension funds will form a key part of your retirement income, so you should be aware of the tax implications when you start to draw your funds.

If you are in the UK, you can usually take 25% of your accrued fund tax-free. If you are a US resident, however, the IRS lmay see this as taxable income.

However, under the terms of the UK/US Tax Treaty, you may be able to treat this as federally tax free This is a complex topic and we strongly recommend that anyone considering taking their PCLS engage a qualified and experienced cross-border tax adviser to treat and report this correctly.

The remainder of your fund will be taxed by HMRC at your marginal rate of Income Tax. However, the IRS will also see this as taxable income if you are resident in the US and you may have to apply to HMRC for a refund of any UK tax paid.

In these circumstances, you will need to confirm to HMRC that you are a non-UK resident and apply for an NT tax code, so that your income is only taxed in the US.

Keep in mind our standing recommendation is to work with a cross-border tax professional if you’re in the US and have non-US assets.  A tax advisor will advise you on the correct forms to file for your UK pensions and on the taxation of both the initial 25% lump sum and subsequent withdrawals.

Get in touch

If you are a British expat living in the US and would like to talk about your own financial planning arrangements, please get in touch to arrange an exploratory Zoom call to talk through your options.

Please note

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