There are millions of British expats who live in the United States, as well as thousands of US residents who work in the UK. When it comes to retirement, managing your pension plan account for both residencies can be complicated.
It may be a good idea to transfer your UK pension plan to a US-regulated pension plan such as a 401(k), IRA, or Roth IRA. However, there may be some uncertainty about the legal status of transferring a UK pension to a US pension.
Our CEO and Independent Financial Advisor, Dominic James Murray, explains about the reality of Defined Contribution vs 401 (K) and the reality of transferring your UK pension to USA in one of our YouTube video below.
Can I transfer a UK pension to the US?
Is it possible to transfer my UK pension to my US pension? Unfortunately, neither UK nor US legislation allows you to transfer your UK pension to a US pension or vice versa. Both UK and US pensions cannot be combined.
For example, if you are a British expat who has worked in the US for 20 years or more and wishes to spend your retirement there, or a US citizen who has worked in the UK for 30 years and hopes to spend your retirement there, this may be very frustrating. You want to manage your pension schemes in a flexible manner in the area where you live and consolidate it in the tax-regulation area where you live.
When you or your employer contribute to a UK pension scheme, you may be eligible for tax relief. Getting tax relief on your UK pension contributions means that some of your money will go into your pension fund instead of going to the UK government as tax. This is similar to tax-deductible contributions in the United States.
Because UK pension income is taxable, the government will receive a portion of this revenue when you withdraw your pension. The UK government is opposed to the possibility of tax revenue leaving the country. There are, however, ways to transfer your UK pension to the US without incurring tax penalties. One of these options is to transfer your UK pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) or an International SIPP.
401(k) vs UK Pension
401(k) plans are designed to help people save for retirement by providing tax-deferred savings and employer matching contributions. Up to a specific limit, the employer matches a percentage of employee contributions. The term “401k” refers to the section of the tax code that establishes contribution limits.
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 has the option of specifying how much they want to contribute or having an automated rate applied to them. Contributions to a 401(k) plan are deducted directly from the employee’s paycheck. Contributions will be tax-free or deductible depending on the type of 401(k).
Your contributions will then be invested on your behalf by the company; a typical 401K investment plan includes stocks, bonds, and funds. Rather than giving employees complete control over their finances, the company will usually give them a choice of investment portfolio options.
The 401(k) is similar to the workplace pension scheme in the United Kingdom. Every citizen in the United Kingdom has the right to a workplace pension plan that is paid for jointly by the employer and the employee. Both the employee and the employer contribute to the 401K plan in the United States.
You have the right to save for retirement in an HMRC-regulated employment pension scheme in the United Kingdom. Your pension fund can be invested in a DB scheme, a DC scheme, a stakeholder pension plan, or a SIPP. These types of occupational pension plans allow you to defer taxes on your retirement savings until you begin withdrawing them, usually between the ages of 65 and 70.
- The number of retirement benefits is dependent on investment returns and contribution levels.
- Contributions are entirely up to you.
- Employer contributions are capped at 25% of wages.
- Assets may be accumulated or held in separate accounts.
- Assets need to be combined.
- The cost of administration is typically lower, but a smaller deduction is still allowed.
- The retirement benefit is predetermined, and yearly contributions are calculated to meet the goal.
- Normally, a contribution is required every year.
- Employer contributions are not constrained to 25% of pay.
- Assets need to be combined.
- Although administration costs are typically higher, a higher deduction might be permitted.
Defined Contribution vs 401(k) Pension
Defined Contribution and 401(k) pensions cannot be compared because the former only applies to the UK pension system and the latter only to US residents. However, an International SIPP is your best option on the market if you are a British expat and want to spend your retirement in the US.
If you intend to immigrate to the United States or are already there and want to combine your UK pension plan while residing in the United States, international SIPPs are one of the alternative personal retirement plan options for you. HMRC has authorised two different types of self-invested personal pensions: the Self Invested Personal Pension (SIPP) and the International Self Invested Personal Pension (iSIPP). Both schemes have exactly the same structure because they are HMRC-regulated plans, but they can serve different purposes.
UK SIPPs are intended for UK residents only, while international SIPPs are intended for non-UK residents. International SIPPs enable you to manage your UK retirement plan effectively by keeping assets in the UK but managing them from overseas as a non-UK resident.
Cameron James, Expat Financial Planning – Your Trustworthy Pension Transfer Specialist.
Cameron James Expat Financial Planning is the preferred independent financial adviser for Final Salary pensions and SIPP transfers. With over ten years of experience in pension transfers, 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 as an expat and a US resident. Our mission is to bring regulated and transparent advice to our clients. As such, our clients know how much their advice will cost in advance, with no hidden fees.
Cameron James Expat Financial Planning has a sophisticated cash flow management system in place. Our senior management team has a decade of experience in serving expats and is committed to serving the requirements of expats for decades to come.
Transferring a DB or DC pension into a SIPP plan for expats is not a simple decision. Before deciding, many details and procedures must be thoroughly understood. Without this knowledge, the benefit could turn into a potential loss.
It is essential to seek competent advice from a qualified financial adviser to verify that your profile matches the options available and to ensure that your choice meets both the UK and US regulations. Meet one of our dedicated advisers to get a full understanding of SIPPs through the button in the right side.