Approximately one million British expats are living in the US. Hundreds of thousands of US citizens are working in the UK and are entitled to UK pension benefits. If you decide you want to retire in the US, you may choose to transfer your UK pension to a suitable solution. For instance, you may have a defined contribution plan; you could move it to the US and invest it in a 401K defined contribution or IRA. However, you will not be allowed to directly convert any UK pension to a US retirement account such as a 401k or IRA under existing US law.
Transferring your UK pension to the USA is still allowed, but only under certain conditions.
The best retirement plan for US expats is an International SIPP; the assets remain in the UK but are accessible in the USA. With an iSIPP, you may invest your pension in various assets such as ETFs, bonds, mutual funds, shares, major currencies and investment trusts. In addition, they may be kept in multiple currencies, including US dollars, allowing you to hedge any currency risk. Check out our in-depth explanation of International SIPP here.
Even if it is not on your top priority list when moving to the US, it is critical to ensure that your International SIPP is handled in a way that satisfies, both US and UK, tax and pension regulations.
Relocating to the US with an International SIPP
Many UK citizens with SIPPs who migrate to the US will find they are unable to work with their current provider. This is because many of the SIPP providers in the UK will not cooperate with US residents, even if they have spent most of their working careers in the UK. Many UK investment administrators are in the same boat. Similarly, investment administrators in the US are unfamiliar with the UK pension systems.
That is why you must carefully select a SIPP provider who offers an International SIPP that is compatible with US requirements.
The risks of neglected International SIPPs
Professionals and executives who relocate to the United States may be confused over their pension options and often neglect their iSIPP. Hence, expats may resort to the ineffective approach of not informing their pension provider that they have relocated to the US.
Any financial institution with which you have an account must have the correct information about your tax residency status to meet its tax and regulatory requirements. It also creates various issues for iSIPP plans, impacting the investor and being challenging to correct afterwards.
For example, suppose the SIPP administrator is unaware that the pension holder has become a US resident. In that case, they may make investments or follow an investing plan that is no longer suitable. Indeed, the administrator may be unaware of the regulations that apply to US citizens. This is a dangerous scenario, especially if the International SIPP is the pension holder’s primary source of retirement funds.
The IRS does not recognise the SIPP wrapper as a pension, so it is not given favourable tax status. However, under the double taxation agreement, you are able to apply the UK tax favourable status. If you fail to have the incorrect details on your account the double taxation agreement may not apply and you may be liable to pay US tax penalties. Moreover, the SIPP provider may not pay pension income to overseas accounts and you could face extra fees from ones that do.
US tax reporting
Another issue for SIPP holders who move to the United States is US tax reporting. How to report UK SIPP on US tax returns?
Residents of the United States must report all sources of income and profits to US tax authorities, or there will be consequences from the IRS. This can be more complicated in the case of International SIPPs since the structure of the International SIPP requires extra information reporting obligations. Many providers use a trust structure, which might result in these additional IRS obligations.
This is something that the investment administrator should be aware of as well.
The IRS does not immediately recognise a trust-based SIPP as a pension arrangement eligible for preferential tax treatment. However, this issue can be avoided by using the appropriate provisions of the UK/US Tax Treaty when submitting the individual’s yearly US tax return, safeguarding the individual’s tax-favoured treatment.
However, in rare cases, not applying this tax treaty relief may result in a preferable tax outcome. An accountant with competence in US tax reporting and UK SIPPs will often be required to make the determination.
Why the SIPP UK / US Tax Treaty exists
Most countries have some sort of income tax that residents are required to pay. This can be an issue since American expats must pay US income taxes in addition to any taxes paid abroad. The US is one of the few countries in the world that taxes are based on citizenship rather than the place of residency. As a result, some expats were required to pay taxes twice: once in the United States and once in their country of residence.
While certain measures, such as the Foreign Earned Income Exclusion and the Foreign Tax Credit, helped ease this, there were still some thorny issues—for example, US residents residing in the UK fell into difficulties when it came to pension taxes. To address these issues, the US engaged in individual tax treaties. The primary goal of these tax treaties is to eliminate double taxation, and the United States’ pact with the UK is no exception.
The UK/US Tax Treaty, formally known as the “Agreement between the Governments of the United States of America and the Governments of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Regard to Taxes on Income and on Capital Gains,” also covers issues such as capital gains taxes between the two countries, income taxes, and tax evasion.
Cameron James – Expat Financial Planning
Cameron James can assist you in managing your International SIPP if you decide to relocate to the US. We have extensive expertise administering International SIPPs for UK residents relocating to the US and would be pleased to share our pension advice on how we can help you. We understand the problems involved in this circumstance.
We are well-equipped to manage ongoing investments in an International SIPP. Our investment approach is designed to prevent the tax traps that can occur as a US connected individual subject to US taxation. We may also manage International SIPP portfolios based on which currency (Sterling or Dollar) is best suited for the client’s situation.