What should U.S. expats know about UK pension schemes? (2024)

FAQs

What should U.S. expats know about UK pension schemes? ›

If you're a U.S. citizen with a UK pension scheme, you're required to report this to the IRS. You'll likely need to file Form 8938, “Statement of Specified Foreign Financial Assets,” and possibly FinCEN Form 114, commonly known as the FBAR (Foreign Bank and Financial Accounts Report).

The UK State Pension is an exception and does not need to be reported on your US tax return. However, employer-provided pensions, private pensions, and SIPPs (Self-Invested Personal Pensions) are subject to reporting on your US tax return and on your FBAR as foreign financial accounts.

Your UK State Pension if you've lived or worked abroad

Your UK State Pension will be based on your UK National Insurance record. You need 10 years of UK National Insurance contributions to be eligible for the new State Pension. You may be able to use time spent abroad to make up the 10 qualifying years.

Most UK pension providers will block you from making any attempt to transfer your funds to a US scheme not approved by HMRC as a ROP, as you could incur a 55% tax charge on your pension funds if you do so. And, even if you are able to transfer into a US-based ROP, you'll likely be faced with a 25% tax charge.

If you live abroad but are classed as a UK resident for tax purposes, you may have to pay UK tax on your pension. The amount you pay depends on your income. You need to tell HMRC if you move abroad. If you're not a UK resident, you don't usually pay UK tax on your pension.

30+ years. Social Security benefits will be reduced by the lower of $6,690 (2023) per year or 50% of the UK State Pension entitlement. A sliding scale applies for the reduction to US Social Security benefits. The closer you get to 30 qualifying years, the less WEP will apply.

If the pension is in a non-treaty country then the general rule is that the pension is taxable even during all phases of contribution, growth, and distribution because there is no specific rule that exempts foreign pension income in a non-treaty country from U.S. taxation.

Frozen state pensions is the practice of the British Government of "freezing" UK State Pensions, (that is, not uprating the amount in line with "Triple Lock" on an annual basis, as is done for residents in the UK), for pensioners who live in the majority of other countries, apart from the European Community countries ...

Are U.S. citizens eligible for UK state pensions? Yes, U.S. citizens who have contributed sufficiently to the UK National Insurance can claim UK state pension benefits. However, it's important to note that these benefits may be taxable in the U.S.

Unlike in many other countries, there is no legal mechanism for transferring UK pension funds to the USA, in recent years many holders of UK pension schemes have transferred their funds using what was then a QROPS and is now a ROPS (Recognised Overseas Pension Scheme) via an offshore location, typically Malta.

What is the 5 year rule for QROPS? ›

If you move countries within 5 years of the transfer, fill in form APSS 241 and give it to your scheme administrator. You'll: get a refund if you've moved to the country your QROPS is based in. have to pay 25% tax on your transfer if you've moved away from the country your QROPS is based in.

Age Pension can generally be paid even if you live in another country, what changes is the amount you receive. That amount is determined by how long you plan to be abroad and any International Social Security Agreements, which may apply.

The U.K. recently closed its retirement visa program, meaning retirees don't have a straightforward way to get into the country. Fortunately, the U.K.'s other visa avenues are still open. So, retired couples can apply for work, ancestry or family visas. These visas have varying costs and requirements.

Your UK pension must be reported as foreign income on your US tax return, which means you'll use Form 1040 to report the income. If you want to claim a Foreign Tax Credit for the taxes you've paid in the UK, you might also need to fill out Form 1116.

You can live abroad and save into a UK pension scheme. But there are limits to the tax relief you can claim on your contributions. Living abroad, or working for an employer who is based overseas, means tax relief on contributions might be limited – or not available at all.

US Social Security Benefits

According to the UK-US Double Taxation Treaty, only the UK has the authority to tax these payments. You must declare these benefits on the foreign pages of your UK Self-Assessment tax return, as stated in Article 17(3) of the treaty.

Limit on excludable amount

The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2023, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $120,000 per qualifying person. For tax year 2024, the maximum exclusion is $126,500 per person.

State Pension and Income Tax. State Pension income is taxable but usually paid without any tax being deducted. You no longer have to pay National Insurance contributions when you've reached State Pension age.

The US-UK tax treaty is an essential tool for US citizens living in the UK, offering protection against double taxation, reduced withholding tax rates, and clarity on tax residency. While the treaty provides numerous benefits, claiming them requires understanding and filing specific forms.

Whether you need to pay depends on if you're classed as 'resident' in the UK for tax. If you're not UK resident, you will not have to pay UK tax on your foreign income. If you're UK resident, you'll normally pay tax on your foreign income.