Key Considerations Before Making a UK Pension Transfer
For UK expats living in the United States, transferring a UK pension may sound like a way to simplify retirement planning. But in many cases, a transfer may come with unintended consequences. Before you take any action, it is important to understand the rules, risks, and long-term implications.
Most US pensions cannot receive UK transfers
To transfer your pension without penalties, the receiving plan must be a Recognized Overseas Pension Scheme (ROPS). The United States does not currently offer ROPS-registered plans, which means direct transfers to IRAs or 401(k)s are not allowed under UK rules.
Attempting a transfer could trigger a UK tax charge
If you transfer to a non-qualifying plan, you may face a UK tax charge of up to 55 percent of the value of your pension. Many people are unaware that simply moving funds to the US can result in a taxable event back in the UK.
You may lose valuable UK benefits
Defined benefit pensions often include inflation-linked income, spousal protections, and death benefits. These features are typically lost in a transfer. Even defined contribution pensions may include guarantees that are not replicated in US plans.
There may be US tax consequences as well
Transferring your pension to a non-ROPS plan can create US tax reporting issues and lead to immediate income recognition. The IRS may treat the transfer as a taxable distribution, even if you have not actually withdrawn the funds.
Partial transfers are not always the answer
While splitting a pension may seem like a way to gain flexibility, partial transfers are subject to the same UK and US tax risks. Unless the receiving plan qualifies under both systems, you could still face penalties or reporting requirements.
The decision is often irreversible
Once your pension has been transferred out of the UK, it can be difficult or impossible to reverse the action. If market conditions, tax laws, or personal circumstances change, you may not be able to reestablish your original benefits.
Seek advice from a cross-border specialist
A transfer can be the right move in limited situations, but it requires professional guidance. An advisor familiar with both UK and US tax and pension rules can help you evaluate your options and avoid costly mistakes.
Some of the content of this communication was provided by third parties of BlackPoint Capital Partners. We have not verified the information contained herein, but we believe the content is reliable. None of this content should be construed as legal, accounting or tax advice. Tax laws are complex and often have highly-individualized requirements, you should seek the advice of a competent tax professional if you have specific tax questions.
