Where should expats in the USA place their pension?
British expats resident in the US may be tempted to place their retirement savings in overseas pension schemes. But would they be better off with a UK based scheme?
By Mark James
Many British expats, who are now living in the US, may request transferring their UK pensions over to the USA; however, the US will not accept any transfers of pension plans that are not organised in the United States and therefore a UK pension cannot be transferred. An alternative option for many expats was to transfer your UK scheme to a ROPS, which used to be a legitimate pension solution for a great many British expats. These schemes were called QROPS (Qualifying Recognised Overseas Scheme).
However, in March 2017, the UK Government announced an immediate 25% tax on such transfers unless the individual was a resident of the country where the ROPS scheme is registered. This had a huge impact on the ROPS market and many providers have seen transfers drop considerably.
At ABG, we always considered these transfers, for expats in the US, as potentially taxable by the IRS and as such, we have consistently recommended using a flexible UK pension instead.
Flexibility and Pension freedoms
There were major changes in 2015 within UK pension legislation, which related to greater freedoms for defined contribution schemes.
Before the changes took place, members who had a defined contribution pension were only allowed to take up to a certain maximum annual income from their own pension pots. This was known as a ‘Capped’ income drawdown and the maximum was restricted by the UK Government; members were therefore caught by this legislation. However, these rules have since been removed and the old maximum ‘Capped’ income limit has been replaced with a new ‘Flexible’ income drawdown.
Using a ‘Flexible’ income drawdown still allows the pension to remain invested while you take an income but now, members are able to withdraw what they want, when they want and how they want, after 55, even their whole pension pot, should they wish to do so.
These new freedoms only apply to defined contribution plans but the legislation does permit members of funded company pensions (defined benefit schemes) to access these freedoms too. However, members must transfer their company scheme into some form of a defined contribution pension first.
The double taxation treaty between the UK and US is in place to avoid double taxation for residents in either jurisdiction. Typically, a UK scheme will take tax a pension income at source and the expat can receive foreign tax credits, if too much has been taken.
Alternatively, you may wish to apply for an NT (no tax) code from the HMRC. This process can be rather a lengthy process but once complete, your UK pension may be paid gross and you simply organise your tax, that is payable, in the US.
In a final salary scheme, also known as ‘defined benefit’ plan, a company will typically offer a spouse 50% of the members’ pension income after death. Some plans may offer more but 50% is rather standard. Upon second death, the income payment cease and there is no pot to pass on.
However, in a ‘defined contribution’ scheme, which is best described as a personal pension, the member is allowed to pass any remaining balance on to their nominated beneficiary. If the member dies before 75, then the beneficiary can receive either a lump sum or an income UK tax free. If the member dies at 75 or older, then the beneficiary will pay tax at their marginal rate on either a lump sum or withdrawals.
This article is a very brief outline regarding UK pensions for expats in the USA. It is a specialised area within financial services and a good understanding of how both systems work is vital for receiving the correct advice. We at Alexander Beard have these proficiencies and have been looking after British expats, in the US, for many years.
If you would like to discuss your pension situation in more detail, please do feel free to contact Alexander Beard USA.
Mark James is a UK/USA cross border pensions specialist with Alexander Beard (USA) LLC. This is not to be considered tax or financial advice.