UK Expat and USA Resident Financial Advice on UK Pensions

There was and still is much confusion on dealing with UK based pensions and investments when you have left the UK for and built-up UK assets as well as for those have lived and worked in the United States, built up pensions and investments there and now live or plan to retire in the UK.

We set out below our stance on UK/US ‘cross border’ financial services and our dealings with the United States regulator.

On international pensions matters, we ask you to read the information below just so that you know a little more about how things operate between UK and USA.  We can help US Nationals/Dual Nationals and UK Nationals with UK pensions, and we do have sources for ‘high street’ branded flexible drawdown/SIPP etc for US residents given that many UK pension companies will not accept US residents for pension consolidation and drawdown, or transfer etc but hardly any, if at all (at present) for annuities.

If You Live in the USA and have UK Pensions:

We are a UK registered business, authorised and regulated by the Financial Conduct Authority in the United Kingdom.  We are fully insured for advice that we give from the UK to clients all over the world.   That said, we are not authorised outside the United Kingdom and as such, new products and services are usually only available for UK residents.

There are many British Expats and US Nationals living in the USA that have existing pensions, investments, financial or tax interests in the UK.  Your US adviser is unlikely to be authorised in the UK meaning they cannot advise on your existing UK interests and likewise, we are not authorised to give advice on new pensions and investments in the US.

Resident in USA

As we are not authorised where you live and your local advisers are unlikely to be authorised in the UK, we operate a similar option to EU residents with 'Reverse Solicitation'.  We do not ‘solicit’ or promote financial services to non-UK residents, but we will accept ‘Reverse Solicitation’ i.e.  you approached us to help you with existing UK taxes, investments, or pensions only.  We will not advise on or arrange 'new/additional money' investments for you, but we will advise on existing UK arrangements that are then actioned/transferred/amended within the UK.  Given this, we will offer the technical advice from the UK on your UK pensions, investments, and tax with our requirement that you also take advice locally in the country that you live to oversee any actions at 'your end' and ensure tax compliance and reporting requirements with your local finance and tax authorities.

Please note we have written confirmation from both our professional insurers and the FCA that all advice that we offer to expats must be offered and delivered from the UK, under FCA regulatory rules and FCA protection and that we are permitted to advise people anywhere in the World according to the UK regulator, but we must check if there any regulatory restrictions where a client lives.  In short, we offer advice as if you were resident in the UK and provided you and your local adviser check with your resident country's regulator that they are happy for us to continue UK advice for you in tandem with your local adviser ensuring tax compliance and reporting requirements with your resident country's authorities.  We will require this in writing from your country's regulator/your local adviser in USA.

All advice is offered from the United Kingdom with the explicit agreement and understanding that any fee for services is offered under the laws of England and Wales and the UK Courts shall have exclusive jurisdiction and no other country’s regulatory or legal systems have any judicial powers over any dealings between us.

UK FCA Permissions

We have written confirmation from both our professional insurers and the FCA that all advice that we offer must be offered and delivered from the UK, under FCA regulatory rules and FCA protection and that we are permitted to advise people anywhere in the World according to the UK regulator, but we must check if there are any regulatory restrictions where a client lives.  In short, we would normally offer advice as if you were resident in the UK and provided that you and your US adviser check with the US regulator that they are happy for us to continue UK advice for you in tandem with your local adviser ensuring tax compliance and reporting requirements with US authorities.  We will require this in writing from your US regulator/your US adviser. 

USA Permissions, Regulation and Scope

We have also checked/been in correspondence with the US regulator, the U.S.  Securities and Exchange Commission, to confirm what we can and cannot advise US residents on.  They are happy for us to advise US residents on existing UK matters only provided you are fully aware that we are UK authorised only and not US authorised so that all advice would be UK regulated and protected.  We do not advise on US based tax, retirement products or investments.

• Nationality: When drawing UK pensions, whether you are a UK national living in US, or a US national/resident drawing a UK pension will also affect what the advice and structure of any transfer/drawing of pension would be.  The US/UK double tax treaty is clear and HMRC’s approach is quite standard as far as the treaty is concerned but you need to be mindful of the inter-governmental agreement (IGA) and your status as US National, UK National or Dual National, as taxation may be different for different schemes.
• Inter-Governmental Agreement (IGA): Signed by both the US State Office and the UK Foreign & Commonwealth Office on pensions and investments, disclosure rules and FATCA reporting means care needs to be taken on the right UK ‘at retirement’ vehicle used e.g., you need to be careful with SIPPs  but this will also depend on the IRS and then your local State taxes in US as to what response and taxation issues you are presented with in the USA.

Availability of UK ‘At Retirement’ Pension Options for USA Nationals that are UK Residents

• All UK ‘at retirement’ options are open to USA nationals that are UK residents.  Care needs to be exercised with annuities, flexible drawdown, and tax-free lump sums from UK pensions as US Nationals, Dual Nationals and some Green Card holders are still required to complete USA tax returns as well as UK tax returns despite not currently living in the USA.

Availability of UK ‘At Retirement’ Pension Options for USA Residents

• Annuities: Whilst legally you can buy an annuity with your UK pension fund, we are not aware of any UK annuity providers that will offer terms to a new non-UK resident.  Some pension annuity companies will offer USA residents annuities if they are existing clients, but most do not.
• Flexible Access Drawdown:  Not all UK pension providers will offer/accept UK pensions funds for flexible drawdown for new or even existing clients that are non-UK residents but happily, there are a few that do, so you do have options but we need to be careful with Self Invested Personal Pensions (SIPPS) and where it invests.
• Tax Free Cash Lump Sum:  When using flexible access drawdown, remember, just because there is usually a 25% tax free cash lump sum payable from UK pensions, this does not mean it is tax free in the USA, this will depend upon whether you are a US National, Dual National or a Green Card holder only.
• ROPS:  Transferring your UK pension fund to a USA pension scheme is legally possible but USA pension providers must be listed and approved in HMRC’s Recognised Overseas Pension Scheme (ROPS) list.  There are currently no USA registered pension schemes that are approved on HMRC’s ROPS list.  However, when and if there are, since 9^th April 2017, a 25% overseas transfer charge is applied when transferring to a ROPS.

Tax Treaty Complications Lump Sums v Income. 

• Firstly, you should understand that lump sums should usually be taxable/non-taxable under local pension laws where the pension is based and not where you live based upon the UK/US tax treaty. 
• Pensions income should be taxed where you live. 
• The problem is that in the UK, 25% lump sums are usually tax free, excess lump sums are taxable.  The US will only recognise tax free lump sums for UK nationals and not US nationals.  In addition, there is an added complication in that after any UK 25% tax free lump sum, the balance of 75% for UK based pension ‘income’ is taxable, so should be taxed where you are tax resident, but for flexible drawdown the remaining 75% is still technically a ‘lump sum’ capital payment and not ‘income’, so technically should be subject to UK taxes and not US taxes but as it is subject to income tax in the UK, the treaty says that ‘taxable income’ should be taxed where you are tax resident.  In addition, in the US, you have national, federal taxes as well as local ‘state’ taxes meaning that complications can arise with the UK/US tax treaty and its interpretation.

UK Resident

The UK has priority on taxation for UK pensions but as a US national/dual national you may also pay additional taxes in the US with credits for any UK taxes paid.

US Resident

• If you take lump sum withdrawals from UK pensions, then the first 25% of a fund is tax free under UK law and the remaining 75% is taxable under UK law but, this can be interpreted differently in the US.  More recently, HMRC is now moving to most taxes being payable in the US as per the first note on ‘Tax Treaty Complications’ above.
• Regular Withdrawals (‘Income’) from UK pension: HMRC usually issues NT (nil tax) codes and you then pay taxes in the US for both US and UK Nationals.

Defined Contribution Schemes (investment fund linked pension schemes)

UK Tax Free Lump Sums – Ad Hoc Drawdowns

• If a UK National is resident in the US, then 25% tax free cash should be tax free in both UK and US at a federal taxes level, but local US State Taxes may apply.
• If a US National or Dual National is resident in the US, then 25% tax free cash is usually taxable in the US at a federal taxes level as well as local US State Taxes may apply.

If Taxable Flexible Drawdown – Ad Hoc Drawdowns – the problem here is that taxable flexible drawdown is considered a lump sum withdrawal in the UK so, as per the tax treaty, it should be taxable in the UK but …

• If a UK National is living in the US, then flexible drawdown should be taxable in UK (as it is a considered a lump sum under UK law), use your UK Personal Allowance and not be reportable in the US but if you fill out a R43 to reclaim any UK taxes as non-resident, then it is reportable in the US but we have frequently seen HMRC now issue full UK tax refunds and then taxes are payable in the US. 
• If a US National is living in the US, then flexible drawdown should be taxable in the UK with no personal allowance as flexible drawdown is technically a lump sum withdrawal that is taxable under UK law rather than ‘income’ and the US should only charge extra tax with UK credits for taxes paid in the UK but this was becoming too complex in that whilst flexible drawdown is technically a lump sum withdrawal, as it is subject to UK income taxes it should be treated as pension ‘income’ and not a lump sum - however we have also seen HMRC now start to issue full refunds and taxable in US.  The safest route is to reclaim UK taxes and pay all in US
• If Dual National – still personal allowance and taxable in UK, not reportable in US BUT we have seen HMRC now start to issue full UK tax refunds and then taxes are payable in the US.

UFPLS – Uncrystallised Fund Pension Lump Sums (cashing in the whole pension fund)

• UK Nationals - UK has priority on taxation and it is taxable in the UK for US residents with their UK personal allowance used.
• If a US National or Dual national, we would expect tax refund in UK and you to pay tax in US.

Small Pots Rules (pension fund total value below £10k)

20% basic rate tax will automatically be withheld in the UK and then we expect:

• UK Nationals the first is 25% tax free and the 75% balance is taxed at 20% basic rate tax after any UK personal allowance, so there may even be a UK tax refund. 
• US Nationals (and dual nationals), we expect a full tax refund from the UK and you to pay taxes in the US.

Defined Benefit Schemes

These are Final Salary and Career Average Salary related guaranteed lump sum and income pension schemes linked to length of service and your salary.

Normal Lump Sum and Pension Income Benefits

• US and UK nationals living in UK = lump sum is tax free in UK and regular pension income is taxable in the UK.  If you are a US National or Dual National, you may be subject to additional taxes in the US.
• UK Nationals living in USA = lump sum is tax free in UK and should be tax free in US (federal taxes) but local state taxes may apply.  Regular pension income should be tax free in the UK with HMRC issuing an NT (nil tax) code and both federal taxes and local state taxes payable in the US.

Trivial Commutation on Small Defined Benefit (DB) Scheme Commutation

• Triviality is where the value of all members DB pension rights does not exceed £30,000 on the nominated date (the nominated date can be any date within 3 months of the start of the commutation period).  The £30,000 value is for all pensions, so if a client has a DB scheme valued at £29,000 and a Stakeholder Pension worth £2,000 on the nominated date then commuting the DB scheme will not be possible.

• The full ‘cashing in’ commutation must be catalogued as ‘Trivial’.  All taxes should be paid in the US (both UK and US Nationals) but we expect UK nationals to not pay US tax on the 25% UK tax free cash lump sum element and the remaining 75% be taxable in US.

Worth a read/watch:  Pay UK Pension Overseas EU and UK Pensions

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