Relocating to another country can be exhilarating and stressful. There are so many little things to consider – and so many huge things to sort out. Your pension scheme may be pretty low down on your ‘to do’ list, but it shouldn’t be.
Many UK citizens moving to the US may assume that their self invested pension plan (SIPP) is something that doesn’t really need attention. That it can just remain where it is and they can use it as they would have done when living in the UK. Unfortunately, this couldn’t be further from the truth. Here, we share with you our experience of helping people sort their SIPP when moving to the US
More about SIPPs and moving to the US
Let’s start at the beginning and look at SIPPs a bit more closely. Most people who have worked as an employee in the UK for any stretch of time will have some kind of pension plan. Employers are now duty-bound to enrol their employees in a pension plan and freelancers are also likely to hold a SIPP into which they can pay money, topped up by the government.
Your SIPP will be managed by a provider who will need to be informed of any changes to your tax residence status. Those who aren’t in the know, or who are willing to remain ignorant to the rules and regulations, may decide to not inform their SIPP provider that they are moving to the US, but this is not a sensible approach.
Most UK SIPP providers will not support accounts for people who have moved to the US. This is because of the Foreign Account Tax Compliance Act (FATCA) reporting requirements. SIPP providers are reluctant to hold accounts for those living in the US because they are unwilling to make sure the investments adhere to the US rules and regulations and to keep up with the complex reporting requirements involved. For example, the IRS doesn’t automatically consider some SIPP accounts, such as trust-based SIPPs, as pension structures that are entitled to tax treatment under the US/UK tax treaty.
What is the US/UK tax treaty?
The US and the UK have a favourable tax treaty compared with some other nations. The two countries have a double taxation agreement in place. In reference to the double taxation agreement, it is set out as follows:
‘the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first mentioned State.’
‘Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.’
This all means that withdrawals from a pension should only be taxed in the country of residence, not the country of origin. It also means that the tax-free lump sum of 25% of the pension, which is available to pensioners in the UK, should also be available in the US.
Therefore, for either citizens of the UK moving to the US, or those from the US moving to the UK, the treaty means that income earned when resident in either country is only taxed once: in the country in residence.
This favourable treaty means that, as an expat of either nation, the income you receive from your pension, even as an expat, should only be liable for income tax in your country of residence. However, this is only the case if your SIPP account is recognised and approved by the IRS.
Can I move my SIPP to a US provider?
Some SIPP account holders moving to the US assume that they will simply be able to move their SIPP to a US-based provider. Unfortunately, this can only happen if HMRC approves the provider as a ‘qualifying recognised overseas pension scheme’ or QROPS for short. There are only two QROPS in the whole of the US and you’ll need to work in specific sponsoring companies to invest in these accounts, so it’s a non-starter for most.
So what’s the solution?
Here at Giles Warren Financial we advise our clients who are moving to the US to give their SIPP plenty of thought. Failing to prepare and take steps to move your SIPP to a provider who supports those not living in the US could leave you without access to your pension fund, or having to pay tax twice on your pension income.
We have worked with a number of clients who have relocated to the US, some with significant wealth in a SIPP. In our experience, there are providers who will support customers living in the US, but they are few and far between. We can do the legwork in locating and transferring your pensions funds to a SIPP provider who will allow you to reside in the US and help you meet the relevant USA reporting requirements . However, it pays to remember that this process can take a number of months, so preparation is the key. Like all things to do with financial and wealth planning, it’s a good idea to start as soon as possible to ensure everything is in place well in advance of major life events and changes.
Giles Warren explains: “It’s tough, but not impossible to take steps to transfer SIPPs to providers who will consider those residing in the US. We successfully moved a client with in excess of £1m in his SIPP to a provider who took care of all the reporting and solved the issues.”
- Giles Warren’s advice and recommendations are based on my understanding of current law and taxation, which may be subject to change in the future.
- The value of investments can, especially over the short term, go down as well as up, and you may get back less than you invest.
- While your funds are transferring there will be a period of time where they are out of the market. During this time, they will not benefit from any uplift in market values. Conversely, they will not be affected by any decline in values.
- The date of this promotion is June 2021, so if you are viewing this after September 2021, then we would suggest calling us to confirm it is still relevant.