If you are currently receiving a UK pension and want to know how to move from the UK to the USA or are coming up on the time when you need to consider how you will transfer a UK pension to the USA, read on to find out everything you need to know. From tax treaty information and avoiding double taxation, to which forms and processes you’ll need to complete and what you need to be aware of, it’s all here.
Claiming a British Pension in The USA
Luck or good planning is on your side from the beginning, as the US and the UK enjoy a reciprocal pension agreement that guarantees your pension will be up-rated to match the inflation rate.
Because of this connected taxation system, contributions made in either country can count towards the pension allotment of the other. This means that even if you have not made enough contributions towards the state pension of either the US or the UK, having worked in both countries may mean you qualify for a full state pension in your retirement destination of choice.
To ensure that both pension systems do not charge you taxes, you should claim tax relief using the US Individual 2002 form and the IRS Form 8802, within the US UK tax treaty. There is also the possibility to receive pensions from both the US and the UK. Take care to ensure that you are not losing unnecessary money to taxation through the Windfall Elimination Provision (WEP), which changes the way that US social security benefits are calculated.
Will My Pension Scheme Be Recognised?
State pension use between the two nations is a well-regulated and controlled interaction, but private pension schemes can be more complicated. To transfer a private pension to the US, your scheme must be recognised through the Recognised Overseas Pension Scheme (ROPS).
These are foreign pension schemes that meet the standards set by the British revenue and customs agency (HMRC), however, that does not necessarily mean they are authorised/accepted by the HMRC. The system was established in 2006 to ensure that British pensioners would be able to access their savings even when moving abroad. The system can also potentially shelter the money from UK taxation, allowing single taxation in the country of residence.
If your current pension plan does not meet the necessary ROPS requirements, then you should consider transferring your pension before you leave the UK. There are only a few US pension schemes that will qualify for ROPS use, and relatively often changing regulations mean it’s useful to check carefully when you are ready to think about making a move. Transferring pension schemes can sometimes lead to charges or penalties, so make sure you consult with an expert before risking your life savings.
Although transferring your pension scheme to a ROPS may or may not the right move for you, another potential plan could be to move your savings into a 401k scheme or Roth IRA. This will not be as simple as transferring money from one source to another, and with taxation regulations and withdrawal penalties, this may not be a viable solution for most people.
Under current UK regulations, pensions cannot be withdrawn until you reach the age of 55, so transferring the funds into a US pension scheme, even though this could mean heavy penalties, could be an option if you need to access the money more quickly. US pension schemes allow early withdrawal (considered ‘early’ before 59.5 years of age) but many charge a 10 per cent fee on top of the federal income and tax rates.
If you are looking to have greater access and flexibility with your money, a UK Self-Invested Personal Pension (SIPP) system may be the way to go. Along with the greater freedom and higher investment return rates, these can often come with higher risk as well, so again make sure you consider the financial implications before acting.
It may be possible to transfer a UK pension to the USA in certain circumstances, but likely will lead to penalties that many will consider too heavy. The continuation of up-rated UK pensions while living in the US, means that it might not be worth transferring your pension, across regardless of the potential benefits. The majority of financial advisors suggest using your British pension in the USA (or using a SIPP) and then claiming tax relief with the UK USA double tax treaty once you begin to draw your pension.
Once you’ve decided how you want to manage your money, the next step will be deciding how to move all your belongings over to the US. For how to move from the UK to the USA, check out our expat guide here, and get in touch with 1st Move International, the professional moving experts. Call now.