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US Expats Guide to Saving for Retirement in the UK

When moving to the UK, if you are employed by a UK firm you will most likely find yourself enrolled into a workplace pension. This is known as 'auto-enrolment'. Through auto-enrolment you will be placed into a suitable direct contribution pension. Your contributions are paid into a pension pot and you will have a range of investment choices available to you: how extensive this range of investments is will depend entirely on the pension provider.

With auto-enrolment, the minimum contributions required are:

Employee: 5% (including tax relief), Employer: 3%

Contribution splits may vary from company to company. Discuss with your HR representative to be sure of how much you and your employer are contributing.

Within this article, we will be highlighting some key features/considerations when it comes to UK pensions.



pensions for Americans in the UK

US citizens and UK pensions

Thankfully, UK pensions are protected by the US-UK Tax Treaty. This means that so long as your money remains within a UK registered pension, it will not face exposure to US taxes.

Furthermore, as UK pensions are covered by the aforementioned treaty, investments held within your UK pension(s) will not be subject to the Passive Foreign Income Company (PFIC) rules, which ordinarily apply to US investors abroad.

See Dunhill Financial’s PFIC Reporting Explained.

Lifetime Allowance

The Lifetime Allowance for UK registered direct contribution pensions is £1,073,100 (2022/23).

Should your pension pot grow above this figure, you will face charges on the excess amount when gaining access to your pension pot (55% for lump sums and 25% for income).

Contribution Allowances

The annual allowance for UK pension contributions stands at £40,000 per year, or 100% of your income if lower. Should you go above this threshold, you will be required to pay tax on your excess contributions.

Carry Forward

Should you have any unused pension annual allowance in the previous three tax years, this can be used in the current tax year, should you have the means and inclination to do so.

For example:

Client: Mr. Smith

Salary £42,000 per annum (Gross)



UK pensions for US expats example


As you can see in the table above, Mr. Smith has been able to carry forward the full

amount from the previous three financial years into the current year’s contributions.

Should this be something you are considering, we recommend discussing this issue with your accountant.

Please note, you must have been a member of a UK registered pension scheme, for each financial year that you are applying carry forward.

Tax Relief

Private pension contributions in the UK are subject to tax relief.

On your workplace pension, whether or not you are entitled to tax relief will depend entirely on how your contributions are made.

Should your contributions be made using the Net Pay Method, contributions that are made before tax can be deducted and therefore tax relief will not be granted, as it is considered to already have been received by means of reducing your taxable income.

If the Relief at Source method is used for your pension contributions, then 20% tax relief (basic rate) is claimed by your workplace pension provider, e.g. an £80 contribution would result in a total contribution of £100.

If you pay higher rate (40%) or addition rate (45%) tax, then you may be able to claim an additional 20% or 25% in tax relief, respectively. This can be done by way of self-assessment, or by contacting HMRC and requesting directly.

Check with your HR Representative on how your workplace contributions are made.

You are unable to claim tax relief on employer contributions, as they are made pre-tax.

Accessing Your UK pension

At present, you can access your UK Workplace/Private pension(s) from age 55, increasing to 57 from 2028.

There are multiple considerations with potentially significant tax implications when it comes to taking income from a UK workplace/private pension, which we will cover in a separate article.

Priorities

If you are thinking about making additional contributions/significant changes to your UK pension(s), we have put together a basic priorities list of considerations. Please note that this is a suggested priorities list and each individual case is different.

1) Putting together an Emergency Fund

Before increasing your contributions, we advise that you should ensure that you have a minimum of three to six months of expenses held in cash, in a readily available account. This is known as your Emergency Fund and acts to provide you with liquidity in uncertain times/unforeseen circumstances (we never know when we are going to need to buy a new boiler or repair a car!).

2) Specific Savings Goals

Once you have established your Emergency Fund, it would now be a good time to consider any specific saving goals that you may have and to budget accordingly for them. For example, saving for a deposit for a mortgage.

3) Specific pre-retirement investment goals

As highlighted previously in this article, you cannot access your UK workplace or private pension until you are at least 55 (57 from 2028) and there are several tax/financial planning implications to take into account when doing so.

Therefore, should you have any investment goals with a time horizon that lands pre-55 or pre-retirement, then it is a good idea to get a full understanding of these goals, what suitable investment vehicles are available, as well as ascertaining your attitude to risk and capacity for loss.

4) Consider increasing monthly contributions or making additional contributions.

Once you have addressed the previous three areas, it may be worth considering increasing monthly contributions or making a one off, or multiple additional contributions.

UK direct contribution pensions act as a great tax wrapper which allows your investments to grow free of capital gains tax and income tax (income tax is potentially chargeable once an individual takes income from the pension).

The longer your money is invested within your pension, the longer you have the potential of cumulative growth. However, ultimately the decision to increase your funding or make additional contributions is a personal one, which will come down to affordability and goals.

5) Consolidating previous workplace or private schemes into your current scheme

Should you have any previous UK workplace or private pension schemes, it could well be worth considering moving them into your current workplace pension. These days, we see people changing jobs and/or companies far more frequently. It is not uncommon for people to reach retirement to find that they have 4+ workplace pensions in different locations.

By having all of your pensions in one place, you can ensure that you have a cohesive investment strategy. Furthermore, you make things far simpler by the time you come to needing to access your retirement funds, by virtue of having everything in one place.

6) Consider transferring funds to a SIPP

Once you have started to accumulate a relatively significant amount in your workplace pension(s) (>£50,000), you may want to consider a transfer to a Self-Invested Personal Pension (SIPP). One of the key advantages of having a SIPP is that they offer a much more extensive choice of investments that are available for you to grow your retirement pot.

You can have a SIPP or multiple SIPPs open alongside your workplace pension. When moving funds over to a SIPP from a workplace pension, it is advisable to keep your workplace pension open. This way you can still receive your employer contributions and periodically move funds over to your SIPP.


If you have any questions, don't hesitate to contact us.


DUNHILL FINANCIAL, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.


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