What should US expats know about UK pension schemes?
Updated on February 25, 2025
Reviewed by
Rose-ann De Villa, an IRS Enrolled Agent and CPA with 14 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in the UK.
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Table of Contents
Can US expats participate in UK pension schemes?
Yes, US citizens in the UK can participate in UK pension schemes, especially if you work there. Unlike in the US, British and American employees are automatically enrolled into workplace pensions, making participation easier.
There is a wide variety of pension schemes in the UK, and understanding the process and requirements for claiming a UK pension scheme while living in the UK could greatly help US citizens plan for their retirement in their later years.
What are the main types of pensions in the UK?
The UK has three main types of pensions that are also available for US citizens:
- State pension: This is the UK’s government pension which is based on National Insurance (NI) contributions.
- Workplace pensions: This is an employer-sponsored pension plan with two options: defined contribution (DC) and defined benefit (DB).
- Personal pensions: These are individual retirement plans set up independently from an employer. They include Self-Invested Personal Pensions (SIPPs), similar to IRAs.
How do I report my UK pension on my US tax return?
It depends on your pension type and how much you contribute. State pensions don’t need to be reported.
If you have a SIPPs, it will likely need to be reported as a Foreign Grantor Trust on IRS Forms 3520 and 3520-A. Get professional help with this.
For workplace pensions, if your employer contributes more than you do, or contributions between you are equal, no special reporting is required. Don’t forget to add your pension to your FBAR and Form 8938 if you’re required to file.
However, if you contribute more than your employer, you will likely have to file your pension as a Foreign Grantor Trust on IRS Forms 3520 and 3520-A. We strongly recommend getting professional help if this is your situation.
Why is it important that I don’t contribute more than my employer?
Workplace pensions are supposed to be “employer-funded,” so a higher percentage of the fund should be from the employer. If you contribute more than the employer, it won’t be classified as a workplace pension anymore but as a Foreign Grantor Trust under US tax laws.
In this instance, you will need to comply with the requirements of a Foreign Grantor Trust, including applying for an Employer Identification Number (EIN) and filing Forms 3520 and 3520-A.
Is there a way around filing IRS Forms 3520 and 3520-A?
Yes, if the pension account provided by your employer is contract-based (as opposed to trust-based) you may not have to file your pension as a Foreign Grantor Trust. Get in touch to get help with this.
How do I know if my UK pension is contract-based?
There are several differences between contact-based and trust-based pensions. One of the most obvious differences is the regulator of the pension. If your pension company is regulated by the FCA (Financial Conduct Authority) it is contract-based. If your pension is regulated by the Pensions Trust, it is trust-based. Some larger providers offer both types of pension, so look at your particular type of pension, rather than the pension provider.
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How can I qualify for the UK’s pension schemes?
Generally, you just have to be legally working in the UK to qualify. If you’re self-employed in the UK you can likely open a personal pension or a SIPP, but only do so with professional US tax advice first. Often, the benefits of the pension are wiped out the US tax costs.
If you work in the UK for an employer, generally you’re automatically enrolled in a workplace pension, and you just need to contribute to National Insurance (NI) for the state pension, which is usually done for you.
What essential documents do I need to prepare?
You will usually need documents to support your proof of identity, proof of residency, and other details. Here is a breakdown of the documents to prepare:
- Proof of identity: Passport, UK driving license, or national ID.
- Proof of residency: Recent utility bill, bank statement, or council tax bill.
- National Insurance (NI) number
- Employment details (workplace pensions): Payslips, P45/P60
- Self-employment proof: Self-assessment tax return, company registration details, or invoices.
How are UK pensions taxed?
UK pensions are subject to both UK and foreign taxation depending on where you live. If you live in the UK when you withdraw, the pension income is taxed as ordinary income with additional tax benefits like 25% tax-free ump sum from workplace pensions and no National Insurance (NI) tax on pensions.
If you go back to the US, you may still have to pay tax there when you withdraw, it is also taxed as ordinary income. Then, you can aslo file a UK tax form (DT-Individual) to claim tax treaty benefits. The reason for this is the UK-US tax treaty states that only the US can tax your UK pension if you live in the US.
Don’t forget to report UK pension distributions on your US tax return (Form 1040).
How many qualifying years of National Insurance do I need for a full UK state pension?
You will need 35 years of NI contributions in order to receive a full UK state pension. At a minimum, you will need 10 years to get any state pension.
However, if you have less than 10 years, you may still qualify due to the UK-US Social Security Agreement. So, it’s important to know the agreement for the qualifying years for US expats in determining pension eligibility and amount.
What happens to my UK pension when I move back to the US?
If a US expat leaves the UK with a pension they already contributed, there are a couple of ways to deal with it. Here are some common options Americans do:
- Leave the pension in the UK: You can withdraw at a later time, the UK does not restrict pension payments to overseas residents. As for logistics, you can have your UK pension paid directly to a US bank account but be sure to take note of potential delays and currency considerations.
- Transfer to a US pension: UK pensions can be transferred to a US IRA or 401(k) through a Qualifying Recognized Overseas Pension Scheme (QROPS). However, this can be a complicating as very few US retirement plans accept UK pension transfers. So be sure to check with your provider for this.
- Cash out early: If you cash out under 55, you will incur early withdrawal penalties which can be a big chunk of your investment and can be up to 55% tax in the UK. The IRS may also tax the withdrawal which could lead to double taxation.
What are UK frozen pensions?
A UK frozen pension refers to a pension that is no longer receiving contributions, but the funds remain invested until retirement. A common scenario is where UK pensions do not receive annual increases if US expat goes back to the US or reside in certain countries.
The funds remain invested and may continue to grow but if the expat pensioner move back to the US, their UK pension remains frozen but accessible. Don’t worry as the funds could still be withdrawn at 55 and can be accessible in another country.
