What do you do with your UK pensions when moving to the United States?
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We have created a new website for British peopel who have moved to the United States and need tax advice.
Relocating from the United Kingdom to the United States ( USA ) is undoubtedly thrilling, but it brings its own financial challenges.
One significant issue you’ll grapple with is what to do with your UK pension income. This isn’t just a logistical quandary; it’s a financial Rubik’s Cube that needs solving. Let’s dive into the nitty-gritty.
You must report a foreign pension to the Internal Revenue Service (IRS) via their 1040 tax return. You may have benefitted from an employer pension in a foreign country. Whilst you may not be drawing down on the pension it is still reportable to the IRS.
We will guide you through the How to process on this page.
Feel free to use our free online US tax estimator calculator.
A Primer on UK Pensions
Before we get into the cross-Atlantic complexities, let’s establish what we’re dealing with in the UK:
State Pension:
This is a UK government-run program funded by National Insurance contributions. Payments start when you reach the State Pension age.
Workplace:
Your employer manages this one, usually with some matching contributions. It’s typically an assortment of stocks, bonds, and other assets.
Personal:
This pension plan you set up for yourself, independent of your employer.
Your UK pensions Options Unpacked in the United States (US)
Let’s go through the alternatives you might consider:
Maintain the Status Quo
The most straightforward route is to leave your pension where it is. This might be practical if you plan a return trip to the UK. But be warned: US taxation on foreign retirement accounts can be intricate, potentially leading to double taxation.
Opt for a QROPS
Qualified Recognized Overseas Pension Schemes (QROPS) allow you to transfer your UK retirement account abroad without the eye-watering unauthorized payment charge of 55%. But be cautious; the IRS isn’t universally accepting of all QROPS. Some might still land you in hot US taxation water.
Liquidate Your UK retirement accounts
If you’re 55 or older, you can cash 25% PCLS out of your pension tax-free. However, this route may incur a hefty tax bill in the UK and the US.
Consider SIPPs and IRAs
You could move your retiement account into a Self-Invested Personal Pension (SIPP) and an American Individual Retirement Account (IRA). This route is fraught with complexities and may still incur US tax obligations if not executed properly.
IRS US 1040 tax reporting on UK & foreign pensions (form 8938, 3520 and 1116)
IRS Form 8833 and Form 1116
Two more forms worth mentioning are Form 1116 for the Foreign Tax Credit and Form 8833 for Treaty-Based Return Position Disclosure. Form 1116 could grant you a tax credit for those payments if you’ve paid UK taxes on your pension income. Form 8833 is crucial if you’re claiming a treaty-based position.
FBAR (FinCEN Form 114)
Required if you have foreign financial accounts exceeding $10,000 at any point in the year. Due 15th April, with an automatic extension to 15th October
IRS Form 3520
Here’s where things get a bit murky. Form 3520 is required for US persons who have transactions with foreign trusts.
It could be considered a foreign trust, depending on how your UK pension is structured. QROPS (Qualified Recognized
Overseas Pension Schemes) and SIPPs might require you to file this form. Failure to file Form 3520 can result in hefty penalties, so consult Optimise as your US/UK tax professional to determine if this form applies to you.
IRS Form 8938
Form 8938 is essentially your declaration of foreign financial assets, and it’s a biggie. If you’re sitting on a UK pension fund, this will likely qualify as a “specified foreign financial asset.” Depending on your filing status and whether you reside in the US or abroad, you must file this form if your foreign financial assets exceed certain thresholds.
For example, single filers in the are required to report foreign assets worth more than $50,000 on the last day of the tax year or over $75,000 at any point during the tax year. These thresholds can differ if you’re married or living abroad.
