'How will my UK DC pension be treated when I move to the US?'

Carol Hipwell, partner at EY Frank Hirth, says:

When you relocate to the US, your UK pension will not be lost or inaccessible. You will have the option of leaving your UK pension where it is, allowing it to continue growing until you reach retirement age. We are not aware of any option for transferring your UK pension to a qualified retirement account in the US, but you are likely to be able to transfer your pension to an alternative UK qualified pension plan with the assistance of a UK financial adviser.

You can access your UK pension when you reach the retirement age set by the pension scheme, typically around 55 years in the UK. Regardless of where you are living at the time of retirement, you should be able to access your pension depending on the rules of the scheme.

The tax implications of your UK pension in the US are significant and complex. UK pension plans do not qualify for deferral under US domestic tax provisions. Employer contributions are taxable, personal contributions are not deductible, and income and growth may be taxed.

However, the US/UK Income Tax Treaty provides relief from the above provisions. The treaty can defer income from UK qualifying pension plans until distributed. There is also a provision that allows employer and employee contributions made to UK pension plans to be tax deferred if within US limits. The US generally reserves the right to tax US citizens on worldwide income and gains despite the treaty, but selected treaty provisions regarding pensions can be claimed by US citizens. Each year, you can choose to use the benefits of the treaty or be taxed on contributions, and possibly the growth in value as well, for US purposes. If you waive the treaty relief for your contributions to the pension plan, it will provide you with basis in the plan to offset against future distributions. You may wish to check the treatment of pensions in your tax returns while UK resident.

As distributions are made, both the US and the UK would seek to tax them. To avoid double taxation, the tax treaty helps to determine which country has primary taxing rights. Pension income is generally taxable in the country of residence unless a lump sum payment is made. They remain taxable in the country where the plan is located. Again, only certain treaty provisions can be claimed by US citizens to relieve US tax.

The US allows an offset for creditable foreign taxes including amounts paid or accrued in the current year, and amounts carrying over from the prior 10 years in the same category. There is also a one-year carryback option, but this significantly delays the ability to offset the US tax. If you are subject to UK withholding tax on the pension income but eligible to claim exemption from UK taxation, you can file forms with the Internal Revenue Service and HM Revenue & Customs to request that the withholding is stopped.

Also, the treaty is applicable to federal income taxes and not binding on individual states. Prior to returning to live in the US we recommend federal and state-level planning advice to understand the tax treatment and any steps you can take to optimise your tax treatment.

The highest balance of your UK pension will, in most cases, need to be included on your annual FinCEN Form 114, the form known as the 'FBAR' and, if applicable, on Form 8938. There are severe penalties for failing to accurately report foreign financial accounts and assets on a timely basis.

Other considerations include whether:

• the underlying investments within the pension require disclosure as Passive Foreign Investment Company investments
• your own contributions would trigger additional reporting of the plan, and
• the Net Investment Income Tax is also deferred.  

Despite complexities, saving in a treaty-protected plan for retirement can offer significant tax advantages. We recommend seeking financial and tax advice to make informed decisions on pension investments and tax matters.