The governments of the United Kingdom and the United States have both established legislation encouraging their citizens to save for retirement. The government offers tax benefits to funds that are invested in a certain pension account.
We continue to receive questions about whether or not it is possible to transfer a UK pension plan to a 401(k) or another qualifying US pension plan due to the tax differences between the two nations, and vice versa. In this article, we will explain it thoroughly. Before we discuss further, watch our YouTube video below presented by our CEO and Independent Financial Advisor, Dominic James Murray.
401(k) vs UK Pension
In the United States, the US government initiated various regulations to encourage US citizens to save for retirement. 401(k) plans are designed to help people save for their retirement by offering tax-deferred savings and matching contributions from their employers.
The employer matches a percentage of employee contributions up to a certain limit. The ‘401k’ is a reference to the section of the tax code in which the contribution limits are set.
The employer matches the contribution with a qualifying contribution percentage set by the IRS. Employers who match employees’ 401(k) contributions often do so at a rate of between 3% and 6% of the employee’s income paid into the retirement plan.
The employee can either specify how much they want to contribute, or an automated rate will be applied to them. Contributions to a 401K plan are withdrawn straight from the employee’s salary. Depending on the form of 401K, contributions will be tax-free or tax-deductible.
The company will then invest your contributions on your behalf; a typical 401K investment plan comprises stocks, bonds, and funds. Rather than providing the employees with total control over their finances, the company will normally provide them with a selection of investment portfolio options.
The 401K is comparable to the UK workplace pension scheme. In the United Kingdom, every citizen has the right to a workplace pension plan that is jointly paid by the employer and the employee. In the United States, both the employee and the employer contribute to the 401K plan.
In the United Kingdom, you have the right to save for retirement in an HMRC-regulated employment pension scheme. You can put your pension fund into a DB scheme, a DC scheme, a stakeholder pension plan, or a SIPP.
These types of occupational pension plans allow you to receive a deferred tax benefit on your retirement savings until the day you begin to withdraw it, which is usually between the age of 65 and 70.
Can I roll over a 401(k) to another US Pension Plan?
If you are a US resident with a 401K pension plan, you have the right to roll it over to another eligible US pension plan. You can roll it over only if you meet the eligibility requirements of the plan to which you’re rolling it over to.
A rollover 401(k) occurs when you withdraw assets from your 401(k) account and transfer them to a tax-advantaged retirement plan, according to the IRS. The term rollover refers to the adjustment you want to make while changing jobs or if you are dissatisfied with your current 401(k) retirement plan. A 401(k) can be rolled into an individual retirement account (IRA) or another 401(k).
Can I Transfer My UK Pension to Another UK Pension Plan?
In the United Kingdom, If you are a UK resident, you can transfer your UK pension assets from a DB scheme, stakeholder pension, workplace pension, or DC pension plan to a UK SIPP, a QROPS or an International SIPP if you are a non-UK resident.
Read more about the UK pension transfer
Can You Transfer Your UK Pension to Your 401(k) pension?
If you have a UK pension plan and are retiring in the US, and you want to transfer your UK pension to a US pension scheme such as a 401(k), the answer is no, you cannot transfer your UK pension to a US pension plan such as a 401(k).
Pensions in the United Kingdom and the United States cannot be combined. You cannot transfer one into the other or the other way around, and therefore you cannot move a UK pension into a 401k or a 401k into a UK pension.
Find out more about the 401(k) pension plan.
We understand how frustrating this is because if you’ve lived in the US for 20 years and now live in the UK, or vice versa, it would be good to bring everything together. However, it is loaded with trouble.
When you make UK pension contributions, you receive tax benefits on the way in. It is the tax incentive granted to your pension contribution by the UK government, since it is deducted from your UK salary before you are taxed on that income.
If you are on your way out of a pension pot in the United Kingdom, the government expects you to pay taxes on it. The other opposition is that if you have a pension asset in the UK, you can’t just drop it into your 401k because it’s a separate tax regime, different tax even per state, in the US, as you all know, there are different tax regimes in terms of contributions and withdrawals, funds, taxes, and so on.
If you live in the UK and are an American citizen, or live in the US and are a UK citizen with UK pensions, you can still keep your pension pots slightly separated. It’s also quite simple and clear in the United Kingdom to consolidate your Defined Benefit or Defined Contribution, stakeholder, or personal pensions into a single International SIPP.
International SIPPs are one of the possible alternative personal retirement plan options if you plan to migrate to the United States. Likewise, if you already live there and want to consolidate your UK pension plan while living in the United States.
An International Self-Invested Personal Pension Plan is a tax-advantaged investment designed to consolidate your UK pension schemes from wherever you reside to access greater flexibility and control over your pension funds before and during retirement.
You may manage all of your UK pensions in one place, and we can also ensure that the capital is possible to be invested in US dollars within an International SIPP. This is possible in contrast to a standard UK SIPP, which can only hold GBP.
International SIPPs have several important features that provide you with a wide range of investment options, such as the ability to invest in a variety of currencies, including the major three of USD, GBP, and EUR. Due to this currency flexibility, clients in the United States can keep some or all of their UK pension assets in USD, as part of their retirement fund.
Find out more about International SIPPs.
Cameron James Finance – Expat Financial Planning
Cameron James – Expat Financial Planning is one of the few companies in the industry to hold both an FCA and an SEC licence. We truly understand the UK perspective, primarily on pension transfers, as well as the US perspective. Our financial advisors are fully licensed and qualified to perform the pension transfer in both countries.
There may be financial advisors in the US who have done more than us in terms of working strictly on US 401Ks and rollovers. They will not, however, be able to look after everything for you so that you understand both the UK and US sides of the spectrum.
Many concerns, such as your equity, withdrawal, or tax benefit, can only be understood by an IFA company that is qualified in both countries. So, that’s when working with a cross-border financial advisor emerges.
Cameron James – Expat Financial Planning is the preferred independent financial advisory service for International SIPP transfers. With over 10 years’ experience in transferring pensions, Cameron James is now servicing clients in 26 countries.
We have the qualifications and technical knowledge required to help you transfer to an International SIPP both as an expat and US resident. Our mission is to bring regulated and transparent advice to our clients. As such, our clients fully understand how much their advice will cost in advance, with no hidden fees.