When considering a UK pension transfer, there are three questions that need answers:
- Should I transfer away from my existing arrangement(s)?
- If I do leave my current pension scheme(s), what will I transfer to?
- OK, I transferred my pension(s), now what?
Let’s deal with each one in turn:
1. Should I transfer away from my existing arrangement(s)?
The answer to this question will differ dramatically depending upon the type of UK pension(s) you hold.
There are two types of UK pension – Defined Contribution (also known as “Money Purchase”) and Defined Benefit (also known as “Final Salary”). The type of pension you have will impact whether you should transfer it.
Analysing whether to transfer out of a Defined Contribution pension is relatively straightforward. Moving a pot of money from one type of UK pension to a different type of UK pension should not be taken lightly – and there are certain things to look out for (charges, surrender penalties, guaranteed annuity rates etc.) – but it is not a complicated process to analyse, determine and, if appropriate, transfer it.
Considering a transfer away from a Defined Benefit / Final Salary pension is a completely different beast.
Furthermore, the FCA (UK regulatory body) requires you to obtain formal UK advice on whether the transfer is in your best interest.
Please note that transferring out of a defined benefit pension is unlikely to be in the best interest of most people.
Once you have considered whether a transfer away from your current arrangement might be best for you, the next part of the equation is:
2. If I do leave my current pension scheme(s), what will I transfer to?
In general, we find that the most appropriate solution for British expats living in America with UK pensions is an “International SIPP”. A SIPP, a self invested personal pension, is broadly the UK equivalent to an IRA in the US.
If you want to understand more about International SIPPs and what it might look like for you, we have another blog on that topic:
And finally, you’ve decided a transfer your UK pension to a SIPP, then the final piece of the jigsaw is:
3. OK, I transferred my pension(s), now what?
Now the real work begins; now you need to grow it! Most importantly, you need to make sure you don’t drain it before you cease to need it.
Keep in mind, this being America, you also need to report your SIPP correctly. Reporting it correctly does not necessarily mean you’re going to have to pay tax on it (unless you’re drawing funds out, in which case you will). But there is a lot of informational reporting of foreign assets required by the IRS and whilst this sort of reporting doesn’t usually lead to immediate tax liabilities, the penalties that may be imposed for even innocent non-compliance can be staggering.
We are not tax advisors and do not provide tax advice. We strongly recommend that all expats, especially those with foreign assets and/or income, work with a specialist cross border tax adviser, ideally one with UK/US experience and expertise.
Back to growing it, you will need to build a portfolio as you would any other investment. Long term inflation beating growth comes from owning good quality companies. It’s a good idea to be conscious of cost when selecting investments and to seek global diversification across multiple industries and countries. Don’t make the common mistake of thinking your investment time horizon is now until you retire. It is not, it is now until you die!
You can manage risk through an allocation to bonds. Diversifying across government bonds and global company bonds is usually good practice. The greater allocation to bonds the lower risk, and thus lower return, the portfolio will generate over the long term.
Always remember, this is your pension and it may represent a significant portion of your retirement portfolio. Everything is now on you. For this reason, you may benefit from working with a financial professional who can manage your investments, as well as your risk, and coordinate your investments with your overall financial plan.
Plan First Wealth is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.