This is a big one – it might be limited in your ability to contribute moving forward, but for many Americans who move to the UK after starting their career in the US, you’ve got one or more employer pension accounts, possibly with substantial balances.
For our purposes, the rules are pretty much the same all of this diverse family of accounts: 401(k), Solo 401(k), 403(b), Thrift Savings Plan, 401(a), SEP IRA, and SIMPLE IRA. These all have significant differences from a US resident perspective, in terms of how much you and an employer can contribute, etc., but they’re all “pension schemes” for the purposes of the US/UK tax treaty.
I’m also assuming that you aren’t in a position to contribute further. That’s not necessarily true if you’re self-employed or working in the UK for a US employer – I’ll ignore those cases for the purposes of this post, though. Same with the possibility of opening one of these accounts while in the UK – that could get pretty complicated.
These accounts can also be rolled into an IRA – I won’t explore that option today, but it’s something I want to look into in an upcoming post, especially since it opens the door to a Roth conversion.
You can keep all these plans once you move to the UK, and enjoy the tax advantages in both countries. For some people, rolling them into an IRA may be an even better option – that decision will depend on your specific circumstances.
N/A, you typically can’t contribute while in the UK – if you’re in a less typical situation and are able to contribute, these plans are likely one of your first options, being roughly equivalent to a UK employer pension.
This will depend a lot of the exact plan, but you’re usually looking at a variety of mutual funds – stock, bonds, US, world, etc. Hopefully you’ve got some options for low-cost index funds, but not always.
PFIC and HMRC reporting funds rules don’t apply, since this is a pension and thus covered under the tax treaty (you probably won’t have a PFIC as an option, anyway).
Risk & Return
Entirely depends what you invest in – capital at risk, no guarantees.
Typically, you can withdraw from age 59 1/2 without penalties, while earlier withdrawals attract a penalty (with some exceptions). You must usually start taking Required Minimimum Distributions from age 72.
If you’re still working for a US company, there’s an option to retire from that company at 55 and start withdrawals then, although that’s pretty rare for Americans in the UK and has some specific rules.
If it’s a Roth account, you can withdraw the contributions early without paying a penalty, but not any gains.
All over the place, depending on the plan. You might have a great plan with rock-bottom fees, or one with terrible fees. If you’re paying much more than 0.1% or so annually, it may be good to look at an IRA rollover to somewhere with better options.
Tax Treatment – Withdrawals
Simple version, for Traditional accounts.
- If it’s a lump sum payment, the US will tax it but not the UK
- If it’s recurring payments, the UK will tax them. If there’s any US tax withheld, you can claim it as a UK foreign tax credit.
There’s an implied question here – what is a “lump sum”? The treaty uses the term “lump-sum payment” but doesn’t define it, neither does the US Technical Explanation or the UK Double Taxation manual. There are some strongly worded articles out there about US tax on a UK pension lump sum – that’s particularly interesting because of the 25% tax-free lump sum on a UK pension.
There’s no similar tax advantage to taking a lump sum from a US employer pension scheme – it’s all taxable income and now we’re just debating about who you’ll pay the tax to (and how much).
My unprofessional opinion:
- Most people want to do recurring payments anyway, which will help keep you in a lower tax bracket. Taking too much at once, like a lump sum, could fairly easily push you into the UK 40% bracket. Recurring payments are pretty straightforward – you pay UK income tax, and claim back any US income tax.
- If you’re envisaging some way in which a lump sum saves you taxes, talk to a professional – it just gets messy.
For Roth accounts, you’ve already paid tax on the income that you used to contribute to the account, so there’s no tax due on withdrawal. The tax treaty is not 100% clear on this (it doesn’t discuss Roth except for IRAs), but this is the common sense understanding and I haven’t found anybody that disagrees – some cautions about needing to make a treaty-based position on your Self Assessment, so if you have significant Roth balances, it may be worth seeking professional advice to make sure you get it right.