US Resident Receiving a UK Pension
Cross-border financial planning can become incredibly complex, especially when you factor in different jurisdictions and tax authorities, such as the IRS and HMRC.
As a US resident with UK pension provisions, you may be confused as to what your best options are, or whether you should consider transferring your UK pensions.
Drawing Down a UK Pension Scheme
If you have previously lived and worked in the UK, it’s likely you have various pension schemes with different providers. These could be company employer schemes, defined benefit schemes, or perhaps personal pensions such as a SIPP (self-invested personal pension).
Drawing down an income as a non-UK resident can become a difficult and administrative process. UK pensions, as the name suggests, are built for UK residents. This means that plans will be held in sterling, will pay out in sterling, and generally will have UK tax deducted at source.
Not only this, but there can also be various administrative hurdles with respect to arranging the cross-border payments, along with currency charges.
All-in-all, this can make the whole ‘draw-down experience’ rather stressful, and in many cases there are better, more streamlined alternatives available.
UK Pension Transfer to an International SIPP
One alternative would to transfer your UK Pension to an International SIPP. Whilst this is still a UK Registered pension scheme, and still registered with HMRC, it is specifically built for Non-UK residents.
This means it offers several benefits when compared to a standard UK pension, for example:
- A fully UK FCA regulated pension scheme that is specifically built for people that have moved abroad.
- Ability to pay into any bank account around the world, and in all major currencies.
- Investments and holdings can also be held in all major currencies, meaning you an invest in your local currency as a US resident, and draw-down in US dollar. This is something that has become particularly useful when considering Brexit and the volatility of the Pound.
- Option to have all proceeds paid out gross of UK taxation. By applying for an NT Code to run alongside your International SIPP, all proceeds will be paid out gross of UK-taxation, saving the hassle of having to deal with double-taxation and tax-refunds from HMRC.
- Lowest cost available structure for an International Pension. International SIPPs offer very low annual trustee fees, especially when compared to the costs of a QROPS.
UK Pension Transfer to a QROPS
Whilst a QROPS transfer as a US resident used to be a viable option, the introduction of the Overseas Transfer Charge has made it a redundant option in most cases.
The introduction of this new tax charge from HMRC several years ago, means that any transfer to a QROPS to an area outside of the European Economic Area (EEA), would incur an immediate transfer charge and penalty of 25%.
For this reason, a QROPS for a US resident is no longer worth considering.
What about the 25% Tax Free Cash Payment?
Although UK Pensions are entitled to a one-off tax free cash payment (or pension commencement lump sum payment), this is only tax free in the UK.
As a US resident and tax-payer, this pension lump sum would have to be declared and would likely be subject to income tax. For this reason, it may not always make sense to take this payment in one, as it could push up your marginal tax rate and result in a large bill due to the IRS.
It’s important before making any financial decision or receiving a lump sum to ensure that you take local regulated tax advice, to get clarity on your situation.
What is my Best Option?
Financial planning and cross-border retirement is never a one-size-fits-all solution. Every individual has different circumstances, objectives and requirements.
To avoid any mistakes or nasty surprises, it’s important to take regulated and independent financial advice.
At Harrison Brook, we are fully regulated by the Securities and Exchange Commission (SEC) through our US advice network. We are whole-of-market independent advisers, and our only priority is finding the best bespoke solutions for our clients.
Get in touch with us today to see how can help with your financial planning.