Workplace Pensions
Published on April 30, 2024
by Rose-ann De Villa, EA, CPA
Rose-ann De Villa, an IRS Enrolled Agent and CPA with 12 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for U.S. citizens and Green Card holders living and working in the UK.
Rose-ann has also talked about starting a business in the UK as a U.S. expat
Rose-ann has been mentioned in the Daily Express UK news wherein she talked about Stimulus payments and Child Tax Credit refunds for U.S. expats in the UK.
Table of Contents
As a US citizen in the UK, should I choose a contract-based or trust-based pension?
If you have a choice, it’s almost always best to choose a contract-based pension. That’s not to say trust-based pensions are bad, but they are more restrictive for US citizens and Green Card holders.
Why is a UK contract-based pension better for a US citizen?
A contract-based pension allows you to pay more money into your pension than your employer does without causing US tax issues. Taxpayers in the UK can contribute tens of thousands of pounds every year to their pensions tax-free. It’s a fantastic way to save for retirement.
In the UK, individuals can contribute a significant amount annually to their pensions tax-free. However, with a trust-based pension, US citizens must ensure their contributions do not exceed those of their employer.
If they do, they face a Foreign Trust Filing requirement with the IRS, which can be costly and come with severe penalties for non-compliance. This issue does not happen with contract-based pensions.
How do I know if my UK pension is contract-based or trust-based?
Contract-based pensions are individual agreements between you and the pension provider, often an insurance company.
Trust-based pensions, on the other hand, are set up by employers and are governed by a trust. This means they are managed by trustees who are legally obligated to act in the members’ best interests.
Here’s a simplified table to help you understand the key differences between contract-based and trust-based UK pensions:
| Aspect | Contract-based Pensions | Trust-based Pensions |
| Regulatory Body | Financial Conduct Authority (FCA) | The Pension Regulator |
| Management | Managed by a pension provider’s investment team | Managed by a board of trustees who make decisions about the pension |
| Responsibility | The provider handles investment choices and member communications | Trustees oversee all aspects, including investment and administration |
| Governance | Subject to specific investment rules set by the FCA | Governed by trustees with a duty to act in the best interests of scheme members |
| Type of Scheme | Includes personal pensions like group personal pensions and SIPPs | Includes occupational schemes, often part of larger master trusts |
In short, the primary distinction lies in who oversees your pension. Contract-based pensions offer individual control but require you to navigate your investment choices, often without direct assistance. Trust-based pensions are overseen by trustees who share the responsibility for the scheme’s performance and adherence to regulations, potentially offering a layer of protection and guidance absent in contract-based schemes.
I want to know more about US taxes abroad
Can I choose where my pension money goes?
It depends on the contact-based pension you have. Some account types allow you to control your investments to a degree. The type of pension plan you opt for influences how much say you have over where your pension money is invested.
In a contract-based pension, you may have a say in where your money is invested to a degree and how conservative or aggressive you want to be. These plans often come with a range of investment options, from stocks and bonds to mutual funds. Most pension account holders leave the investment decisions to their pension provider or turn their pension account into a SIPP so they can take complete control.
Trust-based pensions don’t typically offer the same direct control over individual investment choices. Instead, trustees are tasked with making investment decisions on behalf of all members. However, you may have input into the broader investment strategies or choice of trustees, who are obligated to act in your best interest.
What costs more? Contract or trust-based pensions?
It depends. When it comes to costs, both types of pensions carry fees, but how they’re structured and the transparency of those fees can vary significantly between contract-based and trust-based plans.
Contract-based pensions often have clearer fee structures, with charges for management, administration, and investment options. These can include annual management charges (AMCs) and additional fees for specific funds. The costs are directly linked to the choices you make, providing some level of control over the fees you pay.
Trust-based pensions might offer better value for money, especially for larger schemes benefiting from economies of scale. The fees in trust-based pensions can be lower per individual, as costs are spread out across all members. However, the fee structure might not be as transparent, with administrative and investment costs often bundled together.
What should I think about when picking a pension?
Choosing the best pension option for your workforce involves considering several key factors:
- Investment Options: Assess the variety and performance of investment options offered by the pension. A diverse range of options can cater to different risk appetites among your employees.
- Cost and Fees: Understand the fee structure of each pension type. Lower fees can significantly impact the pension pot’s growth over time.
- Flexibility and Portability: Consider how easy it is for employees to manage their pensions, including the ability to transfer their pension if they change jobs.
- Tax Implications: Analyze how each pension scheme affects your and your employees’ tax situations. Opt for structures that offer the most tax-efficient benefits for both parties.
- Employer Obligations: Evaluate your responsibilities, including contributions, administrative tasks, and legal obligations under each pension scheme.
- Employee Engagement: Choose a pension scheme that is easy for your employees to understand and engage with, enhancing their retirement planning experience.
- Professional Advice: It’s highly advised to get the expertise of a tax professional, as they can provide valuable insights into how your pension choice fits your financial future, ensuring you make the most of your retirement savings.
