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TOP TIPS – Drawdown and Managing a UK Pension in the US

Here we offer some Top Tips to help.

Understand what pension drawdown is

Pension drawdown is an option that allows the retirement saver to choose how much they wish to withdraw from their fund and what they wish to do with it – for example, investing into an alternative retirement account or investment portfolio.

In most cases it is possible to take up to 25% of the fund as a (UK) tax-free lump sum, although some, older, schemes may let you take more. In order to access pension drawdown, you must be 55 or over and have a defined contribution pension.

Understand your options

Ever since 6 April 2015 retirement savers have been able to choose something called “flexi-access drawdown”. This option is similar to an IRA and enables the saver to withdraw up to 25% of their UK pension savings tax-free. The remainder of the fund can be left in situ or can be withdrawn, either as regular payments or as a series of ad hoc lump-sum payments. However, it is important that that a tax advisor is consulted to understand how drawdown income distributions would be taxed if you are a US tax resident.

Further distribution options under the UK flexi pension rules include the following:

  • Lifetime annuities – Can be a fixed, inflation-linked or investment-linked product. Furthermore, can be a single-life annuity or a joint-life annuity.
  • Phased retirement – the fund is split into segments, which are then converted in phases into a series of tax-free cash payments. The income drawn may be taxable in the US while the implications of the UK tax-free distribution should be discussed with a US tax advisor.
  • Uncrystallised funds pension lump sum – Funds can be withdrawn without being transferred to a drawdown plan first: 25% of the fund may be taken tax-free. However, this option can be complex so should be discussed with a tax adviser

Understand the tax implications?

The US places an immediate tax charge on most pension transfers from the UK and often these are simply too high to make good financial sense – for example, the IRS places a 25% charge on a QROPS transfer.

However, by discussing pension drawdown options with a cross-border wealth manager and specialist cross-border tax adviser, non-resident aliens and other overseas individuals may find that there are advantages to transferring into another type of scheme – for example, a Self Invested Personal Pension (SIPP).

Understand the risks?

As with any financial decision, there are risks to opting for pension drawdown. For example, you could reinvest unwisely and lose your money, your investments might not perform to the level on which you have based your retirement income plan, you could receive less back than you originally invested or you could find that the regulatory and cross-border environment changes and causes a negative impact on the performance of your retirement accounts.

One thing is certain, whoever you are and wherever you reside, you need to take advice, particularly if you are an expat living in the United States.

Pension planning advice for British expats in the United States

Blacktower in the US helps British expats and their families to achieve their financial and retirement goals by taking full account of their circumstances, assets, objectives and options to develop a clear cross-border retirement strategy for the future.

Whether you wish to speak to us about pension drawdown, a SIPP transfer or some other retirement planning consideration, get in touch with us today.

Disclaimer: Blacktower (US) LLC is not a tax adviser and independent tax advice should be sought. The above does not constitute advice and Blacktower makes no recommendation as to the suitability of any products or transactions mentioned.

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