UK pension transfers to the USA can be complex and challenging. As it stands, the United States Internal Revenue Service (IRS) does not allow tax-free transfers from foreign pension plans into their domestic equivalents.
This means that a transfer of foreign pensions, such as UK defined Benefit pension to a US 401k or IRA is not a viable option for the expat or Non Resident Alien (NRA) in the US.
This does not mean that there aren’t suitable options for individuals to consolidate their UK pensions. Prior to March 2017 it was possible for US residents to transfer UK pensions to a Recognised Overseas Pension Scheme (ROPS), but changes by the UK Government, who imposed a 25% charge on transfers to ROPS for non EEA residents, effectively closed this avenue for US residents.
SIPP transfers—a good alternative
As an alternative to ROPS, a SIPP (Self-Invested Personal Pension) is likely to be a better option for the British expat in the US. A SIPP is broadly similar to a self-administered IRA account. It can be managed in US dollars and can be comprised of domestic or global investments. This brings many benefits, including currency flexibility for those who need it.
SIPPs and the IRS
Self-Invested Personal Pensions (SIPPs) are a tax-efficient and flexible way to plan for your retirement.
A SIPP is a viable solution for a client considering UK pension transfer options in the US. This is because in 2010 the IRS stated the following:
“If an employer pension scheme in the United Kingdom and a SIPP are both pension schemes within the meaning of Article 3(1)(o), then a transfer of income earned by the employer pension scheme to the SIPP would not be a taxable event in the United States.” *
SIPPs for broad and flexible investment
SIPPs allow for retirement investment in many areas, including the following:
- Stock exchange listed investment trusts
- Commercial property
- Gilts and bonds
- Stocks and shares
- Investment trusts
- Financial Conduct Authority-recognised Open Ended Investment Companies (OEICs)
- Bank deposit accounts
- Exchange traded funds (ETFs)
- Real estate investment trusts
A single pension pot
A SIPP gives you the convenience of being able to place your pensions into a single pot so that you can draw income as and when you need it once you reach the age of 55. And because a SIPP is an actively managed fund with many flexible benefits, you can withdraw up to 25% of the fund as a cash lump sum, tax-free in the UK.
A SIPP is self-invested, this means that unless you are an experienced and proven investor with plenty of time on your hands you should seek advice from a trusted financial adviser or wealth manager to help you manage your SIPP investments in the best manner for your individual circumstances and preferences.
SIPPs may be able to provide many important tax advantages. There may be some relief on contributions, as well as benefits, for those who own commercial property and use a SIPP as their pension wrapper.
Furthermore, a SIPP provides many succession planning opportunities. For example, it is possible to pass the fund to nominated beneficiaries on death who can then choose either to take it as a lump sum, purchase an annuity, leave it invested or, in some cases, arrange for some form of “income drawdown”.
SIPPs advice from Blacktower
The Blacktower Group was formed in 1986 and has since been providing clients in the UK, the EU, the Cayman Islands and now the United States, to help them achieve their investment and retirement objectives.
We offer a bespoke wealth management service including UK pension transfers advice. Contact us today for more information about how we can help you make your money work for you.