Legal & General Pension for US Residents: US Tax, Reporting, and Your Options

What Is the Legal & General Pension?

Legal & General is one of the largest workplace pension providers in the UK. Its WorkSave Pension Mastertrust, which comes in relief-at-source and non-relief-at-source versions, is used by many UK employers for auto-enrolment, and Legal & General also runs the WorkSave Pension Plan, a group personal pension.

Whichever arrangement you are in, it is a UK-registered pension built around a default investment strategy for members who live and work in the UK, with a limited range of self-select funds.

The structure matters more than most members realize. In a master trust, the scheme is run by a trustee board appointed to look after members collectively. You did not select the provider, you did not select the default fund, and you have no direct relationship with either. That arrangement works perfectly well for the employee it was designed for. It has no mechanism at all for the member who moves abroad, because there is nobody in the structure whose job it is to notice.

The Default Fund Problem

This is the part that costs the most and gets discussed the least. The overwhelming majority of workplace pension members are invested in the scheme default, because that is what happens when nobody makes an active choice. Defaults are typically lifestyle or target date strategies: they hold growth assets while you are young and then de-risk automatically as you approach a target retirement date, moving toward bonds and cash.

The de-risking is not arbitrary. It is designed around an assumed destination. Many UK workplace defaults still glide toward a mix intended to support the purchase of a UK annuity, or a UK-style drawdown, in sterling, on a retirement date the scheme set for you when you joined. If you are living in the United States, that destination is almost certainly wrong. You will very probably never buy a UK annuity. Your income needs are in dollars. Your actual retirement date may be nothing like the one on file.

• The glide path is running toward an outcome you will not choose, so the de-risking is happening for the wrong reason and possibly at the wrong time.
• The currency is entirely sterling while your liabilities are in dollars, and a lifestyle fund does nothing about that.
• The target retirement date on the scheme record is often the one you gave an employer years ago, and it drives the whole glide path. Very few people update it, and a US-resident member frequently cannot.
• Nobody reviews it. There is no adviser attached to a default fund, and the trustee board is looking after the membership as a whole rather than your particular circumstances.

None of this is a criticism of the fund, which does what it was built to do. It is a mismatch between a strategy designed for one life and a member living another. Establishing what you are actually invested in, and what target date the scheme is working to, is the first thing to check and it costs nothing to ask.

Protected Benefits: the One Irreversible Check

Before any transfer decision, establish whether your plan carries protected tax free cash above the standard 25 percent, or a protected retirement age allowing access earlier than the normal minimum pension age. Older policies and certain transferred-in benefits can carry either, and both are typically lost the moment the money leaves. Almost everything else in a pension plan can be revisited. These cannot.

Modern WorkSave and personal pension plans are generally understood not to carry an exit charge, which is worth knowing but is not the check that matters. Request the full policy schedule and read it before any decision, wherever you live. If a protected benefit is attached and it is valuable, the right answer may well be to leave the pension where it is and plan the US position around it.

One point of confusion worth clearing up for a US-based reader before anything else. Legal & General America, the US life insurance business trading under names including Banner Life, is a separate operation from the UK pension business that holds your WorkSave plan, and it has been the subject of a sale to a Japanese insurer. If you search the name from a US address you may well land on the American business first. Your pension is with the UK company, and that is the one this article is about.

How Any UK Pension Is Treated Under US Tax Rules

The servicing and investment problems above are specific to a workplace scheme. The tax position is not: it is the same for any UK registered pension held by a US person, whichever provider holds it. This section is a summary of that general position.

The treaty between the US and the UK

A UK-registered pension is generally recognized under the Double Taxation Treaty. In broad terms, this means growth inside the pension is normally tax-deferred for US purposes until you draw benefits, rather than being taxed year by year. The treaty is what stops your UK retirement savings from being treated as an ordinary taxable investment account by the IRS. The IRS publishes the UK treaty documents in full.

One area to treat carefully is the 25 percent UK tax free lump sum. The US does not automatically mirror the UK tax free treatment, and how a lump sum is taxed in the US is a debated, fact-specific area. This is a point to plan for in advance, not to assume. The short version is that the mainstream practitioner position treats it as taxable in the US, a minority position argues otherwise under the treaty, and no court has decided the question. Take it up with your US tax adviser before any crystallization event rather than after.

PFIC: what actually applies

This is where a lot of misunderstanding sits. PFIC reporting does not apply to investments held inside a UK pension wrapper. It is worth knowing the mechanism rather than just the conclusion, because the mechanism is what tells you where the boundary falls. A reporting exception applies to PFIC interests held through an arrangement treated as a foreign pension fund under an income tax treaty, where the treaty defers taxation of the income of the fund until it is paid to the member. That exception sits in the regulations under section 1298(f) and can be read in the Code of Federal Regulations. It attaches to the wrapper.

PFIC becomes a live issue only for investments held outside a pension, for example in a general investment account or an ISA. So the funds inside your UK pension are not the PFIC problem. Non-pension holdings are where PFIC exposure typically arises, and where a US-aware investment approach matters, including on any assets that have to be sold during a transfer.

Reporting: FBAR, Form 8938 and the 3520 question

Even though the pension is tax-advantaged, you generally still have to report it. Most US persons need to include a UK pension on their FBAR, FinCEN Form 114, and, above the relevant thresholds, on FATCA Form 8938. They apply at different thresholds and are not alternatives, and the IRS publishes a side-by-side comparison. These are disclosure requirements, not extra taxes, but the penalties for missing them can be significant.

There is also a grey area around whether a UK pension is a foreign grantor trust requiring Forms 3520 and 3520-A. Workplace pensions with employer contributions are often viewed more favourably here than personal arrangements with no employer input, but positions differ and this is genuinely specialist territory. A limited exemption for certain tax-favored foreign retirement trusts exists under Revenue Procedure 2020-17, and whether it applies to you turns on the detail. It is worth getting a US tax adviser to confirm your specific filing position.

The NT tax code: getting paid without UK tax deducted

When you start drawing a UK pension as a US resident, the treaty generally gives the US the right to tax your regular pension income. Left unmanaged, your UK provider may still deduct UK tax at source, leaving you to reclaim it later. To avoid that, you apply to HMRC through the US-Individual claim process for an NT code, meaning No Tax, so the provider pays you gross and the income is reported and taxed in the US. Putting the NT code in place is a practical but easily missed step, and it is one of the things we handle as part of a transfer. We cover the process in more detail in our guide to the UK State Pension, tax and the NT code.

Why You Probably Cannot Manage a Legal & General Pension From the US

Legal & General is a UK-registered pension, and the treaty protects its tax status. The real obstacle is servicing. Workplace schemes and master trusts are built to communicate with UK-resident members: correspondence goes to a UK address, online access can be restricted, and drawdown or lump sum payments are often only made to a UK bank account. Managing a US-aware investment strategy through a UK-resident workplace scheme is close to impossible.

The UK do-it-yourself platforms you might have used to take control, such as Hargreaves Lansdown, Fidelity, Vanguard, Interactive Investor and AJ Bell, have largely exited the US-resident market. They cite the compliance burden of FATCA and FBAR, and US securities rules that make it problematic for a UK-only platform to let a US resident trade without the oversight of an SEC-registered adviser. We have documented several of these exits as they happened, including Interactive Investor, Vanguard and Bestinvest, and the same pattern at another large insurer in our guide to Standard Life and flexible access for US residents. That leaves most US residents without a domestic do-it-yourself route.

Legal & General Compared With an International SIPP

Table: indicative comparison only. Features vary by provider and change over time, and this is not a quote. Confirm the position for your own plan before acting.