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UK Pension and Tax Essentials for US-Based Expats

Transferring a UK pension to the US is not straightforward

Many UK expats living in the United States want to consolidate their pensions or gain better control over their retirement savings. However, there is no such thing as a UK-to-US pension transfer. Instead, expats typically explore one of three options:

  • Leave the pension in the UK and draw on it from the US
  • Transfer the pension into a UK Self-Invested Personal Pension (SIPP)
  • Transfer the pension into a Qualifying Recognised Overseas Pension Scheme (QROPS)

QROPS transfers used to be popular for people leaving the UK permanently, but US residents can no longer benefit from QROPS due to IRS and HMRC regulations. SIPPs are sometimes used as a consolidation vehicle, but they are still UK pensions subject to UK law and tax rules. US-based expats may need to file specific IRS forms and consider potential double taxation issues. Each option has pros and cons depending on your tax position, age, pension size, and long-term plans.

The US tax treatment of UK pensions is complex

The IRS does not follow the same pension classification as HMRC. For example, UK pensions are generally seen as foreign grantor trusts, meaning income and growth inside the plan may be taxable to the individual in the US even if no withdrawals are made. Many UK pension schemes are not considered “qualified” in the US, which affects how they are taxed.

Some key points to consider:

  • UK employer pension contributions may be taxed in the US in the year contributed
  • Growth inside a pension may be taxed annually in the US unless reporting exemptions apply
  • Withdrawals may be taxed again in the US as ordinary income
  • Special IRS reporting is required (such as Forms 3520, 3520-A, 8621, 8938)

A tax treaty exists between the US and UK, but applying it to pensions is nuanced and requires expert interpretation.

Double taxation is a risk if you are not careful

Although the US-UK Tax Treaty helps mitigate the risk of double taxation, claiming treaty benefits correctly is critical. For example, claiming relief under Article 17 (Pensions and Annuities) may allow for pension income to be taxed only in your country of residence. However, this does not always eliminate the need to file IRS forms or prevent UK tax from being applied at source. Double taxation can occur if distributions are taxed in both countries without proper relief claimed.

Specialist advice is essential

Understanding your options requires cross-border expertise. You will need coordinated advice from both a UK pension specialist and a US tax advisor who understands expat issues. A mistake in classification, withdrawal timing, or reporting can lead to unnecessary tax and penalties.

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.

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