UK SIPP for US citizens – that will be the topic of today’s article.
Nothing written here should be considered as any form of legal, financial or tax advice, and the facts might have changed since we first wrote this article.
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Introduction
Before we get into the details of our topic, i.e., ‘UK SIPP for US citizens’, let us have a look at some of the important information regarding the general definitions and other important aspects.
SIPP – So, what is a SIPP?
Well, ‘SIPP’ is an abbreviation for the Self-Invested Pension Plan. These happen to be one of the best savings accounts in the United Kingdom for people who want to contribute towards their retirement in a tax-efficient manner.
Yes, a pension plan also serves the same purpose, and therefore, you might be wondering what makes SIPPs more unique.
While saving money for retirement purposes, one of the major aspects that need to be considered is selecting the right type of pension plan that suits you.
You can either go ahead with a traditional pension plan or you can choose to invest/save with the help of an aforementioned ‘SIPP’, which is generally offered by an investment platform or a SIPP provider.
In the olden days, people would have to save their funds using a traditional pension plan, which has been changed now.
Nowadays, personal pensions (SIPPs) are offered access to a wide range of investments, offering more flexibility among assets in which you can be able to invest.
Even though some other types of pensions offer accessibility towards several types of investments, SIPPs allow an individual to have access to even more investment opportunities.
For instance, a person can invest directly into shares listed on a stock exchange (and even some shares that are not listed) with the help of a SIPP.
SIPPs are approved by the UK’s ‘Her Majesty’s Revenue and Customs (HMRC)’, which is a non-ministerial government branch responsible for collecting taxes and some other sorts of payments.
Some of the approved investments in which an individual can be able to invest with the help of a SIPP are Stocks, Mutual Funds, Bonds, ETFs, etc.
Similar to the 401(k) plans in the United States, SIPP plans were introduced so that people can have an alternative to the defined-benefit pension plans provided by employers.
How do they operate
To compare some operational procedures of a SIPP, let us have a look at the pension plans available in the United States.
In the US, there are two types of pension plans offering two different sorts of benefits.
The first method is where a person can invest money and have no taxes on the profits, while there would be taxes on withdrawals. We can take the traditional IRAs and 401(k) accounts as examples for this scenario.
There is another method where a person would be subject to taxes on their invested money, yet they won’t have any taxes on the profits or withdrawals. Roth IRAs and Roth 401(k) accounts are an example of this.
However, the SIPP does not opt for any of such methods and has its own set of tax benefits. Meaning, when a person opts for a SIPP in the UK, then he or she can get tax relief of 100% of their earnings for an amount of up to £40,000 per year.
This tax relief is offered to the investor in the form of a refund, which is contributed towards their pension. Let us see an example.
Let there be a person known as ‘George’ and he pays a basic rate of 25% while contributing an amount of £10,000 towards his SIPP.
By doing so, George will get a refund of £2,500 from the HMRC, which is generally deposited directly into the SIPP account George.
However, George can get such benefits only up to an invested amount of £40,000. Upon exceeding £40,000, George would no longer be eligible for the tax relief.
Fees
Just like any other type of investment account, one should pay attention to the fees involved with investing in SIPPs. SIPPs charge fees based on varied factors, and therefore, it is very important to know how you would be charged.
Usually, SIPPs charge fees, which are as follows:
– A flat annual fee
– Percentage of the portfolio value
– Account set up fees (usually around £500)
– Trading charges
– Some other sorts of fees like exit fees and withdrawal fees
It would be ideal to choose a low-fee option instead of one charging higher fees because it could lead to losses when it comes to profits of a long-term investment.
For example, a person who has a portfolio consisting of a higher value should go ahead with a flat annual fee instead of an annual percentage fee.
People who invest in a SIPP can either manage their SIPP on their own or they could acquire the services of a professional investment planner like us.
People who get involved with a self-invested pension plan can withdraw their funds after they reach the age of 55, even though they haven’t retired. Out of these funds, 25% is considered tax-free income, whereas the rest is charged with taxes while being considered as income.
Noticeably, the funds can become free from the UK capital gains and income tax. Ultimately, the tax benefits depend on the specific circumstances of the individual.
Types of SIPPs
There are different types of SIPPs, from which an investor can choose one based on his/her advantages.
- Full SIPPs:
Full SIPPs come with maximum choices of investments for individuals. Nevertheless, they come with hefty account set-up fees and annual charges and are considered to be beneficial for people who have significantly larger pension funds or interests in commercial investments.
Along with these, a person would be required to pay additional fees known as ‘Independent Financial Advisor’s (IFA) Fee’, which is a one-time fee.
There might be some other types of uncommon fees charged for dealing with a commercial property.
Not only that, but fees are applicable when there is an In-specie transfer, where the investments are transferred directly to the scheme instead of selling the assets and investing the acquired cash.
The average amount invested in this type of SIPP is between £150,000 to £450,000.
- Lite SIPPs:
Lite SIPPs are not as effective as Full SIPPs, yet they offer several investment choices. However, the major difference is that individuals cannot invest directly in a property, and they can’t buy unlisted shares.
Lite SIPPs have been made popular by Hargreaves Lansdown, James Hay, Stanley Direct, Barclays Stockbrokers, and AJ Bell.
Typically, Lite SIPPs are ‘execution only’, which means a person won’t be able to acquire investment advice from the institution that is offering them. Moreover, people who opt for Lite SIPPs won’t be having a necessity for an IFA.
The average amount invested in this type of SIPP is usually around £50,000.
Key aspects
Just as it is for most other types of personal pension plans, you won’t necessarily have to live in the UK to be able to take part in a SIPP.
Nonetheless, some important things are to be considered if want to invest in a SIPP even though you are not living in the UK.
First of all, you should know that SIPPs are held within the UK, and hence, the investments, as well as the payments, should also be made in UK’s currency, i.e., GBP (£).
This generally means that when you are a person living overseas and wish to withdraw your funds from a SIPP, then you would be liable to fluctuations in currency exchange rates.
It is generally important to know this information and plan your retirement based on the amount fluctuations that may be involved with currency exchange.
However, if you are from the UK and wish to retire abroad or if you are a resident of another country who doesn’t want to get involved with the UK except for the SIPP, then you can opt for alternatives like QROPS.
QROPS comes with the same set of benefits and allows an individual to invest and withdraw using various types of currencies.
Apart from that, one of the major benefits of investing from abroad is that, when the price of the pound decreases, the amount invested by you in another currency would tend to have an increase.
You should also be aware that your SIPP is in the UK, and it would be subject to the rules and regulations made by the UK Government.
For example, the Government of the UK reduced the allowance for Lifetime Pension Allowance and made it £1 million while it used to be £1.5 million.
Another aspect to be considered is the withdrawals from a SIPP. As we already said, only a 25% pension commencement lump sum is allowed, and people would be subject to taxes for withdrawing the remaining funds.
This situation gets worse for the people who are not living in the UK as they would be subject to taxes again in their country of residence. Therefore, you should get tax advice from your financial planner before things get messy because of taxes.
Lastly, we must talk about the financial advice you acquire while investing in a SIPP. Why? Well, people who invest in a SIPP as an expat or while living overseas usually seek financial advice from an expert based in the UK.
Such an advisor may or may not be aware of existing opportunities available for expats or those living overseas.
When you wish to obtain financial advice from a professional located in your country, then the advice acquired may not abide by the FCA regulations and lower the protection levels of an individual.
We suggest that you opt for an international investment planner like us, who can assist you with such crucial requirements and allow you to invest in a SIPP while having the best possible strategy for your requirement.
We don’t force you to acquire investment advice from us, yet what we offer makes us stand out among other competitors. Let us have a look at the services we offer to you regarding your SIPP.
- We let you understand all the potential advantages and drawbacks of a SIPP.
- We determine your financial situation and determine whether SIPP can be a good choice for you.
- We conduct extensive research and provide you with the best options available, whether you may be an expat, or foreigner, or a UK resident.
- We provide a detailed list of the costs and commissions related to your SIPP and then explain them to you in case you are not familiar with them.
- We even offer services related to portfolio creation and investment management, and therefore, you can manage all your financial needs with the services obtained from us.
- Sit back, relax, and invest in whatever strategy you are interested in, or you can let us do that for you.
One of the huge drawbacks of SIPPs is that your current employer won’t be obliged to contribute towards your SIPP and usually won’t do so under any circumstances.
Not only that, but you cannot be able to transfer your current pension plan into a SIPP while working in the current company.
UK SIPP for a US citizen:
While discussing UK SIPPs for a US citizen, we must pay a lot of attention to the taxation.
If you are a US citizen, then you must already be aware that the United States opts for a citizenship-based taxation system. This means any type of income earned overseas by the citizens is subject to taxation by the Federal authorities.
However, most people also familiar with the information that the income has arisen on some types of retirement funds that are subject to preferential tax rates.
So, it is common to have confusion about whether foreign retirement funds come with preferential tax treatment or not. Well, don’t worry. We are here to help you by providing the necessary information regarding these aspects.
To begin with, let us talk about the scenario for people who are US expats living in the UK, who invested in a SIPP.
There is a tax treaty between the countries USA and UK, which means people won’t be taxed twice for the income they earned while living as an expat in the other country.
This tax treaty determines the details of taxes, i.e., which tax should be imposed by which nation. Any of the income that hasn’t been discussed in the tax treaty is liable for taxes in both countries.
Even though your pension plan is considered a retirement plan according to its design, it would only be protected by the tax treaty when it is wrapped as a pension plan in the UK. For that, the SIPP has to abide by certain types of rules and regulations.
Although your SIPP is covered under the tax treaty, you will have to determine whether you want to claim protection under the tax treaty. Only then, your investments and profits would be free from taxes until distribution.
If you are not able to claim protection for your SIPP, then your contributions and profits are necessitated to be reported to the relevant tax authorities. However, you can claim a Foreign Tax Credit on the taxes imposed on you in the United States.
Therefore, you should very careful while dealing with such things and should be aware that the tax treaty won’t be able to lower your taxes by a great extent.
In most cases, SIPPs are considered grantors trusts and you would be subject to additional reporting. By reviewing forms ‘3520’ and ‘3520 a’, you could know whether the additional reporting process is necessary for you or not.
Lastly, your SIPP can include Passive Foreign Investment Companies (PFICs), and if that’s the case, you will be required to do some additional reporting.
Nonetheless, the Treasury Department has issued some specific regulations that exclude PFICs in your SIPP from such types of hassles. This would apply even when you do not come under the protection of the tax treaty.
Having discussed the situation for US expats living in the UK, now we will discuss the important information concerning taxes for withdrawals in the United States.
As usual, even when you are withdrawing your funds in the United States, you can get up to 25% of the funds in your UK SIPP tax-free.
Why? Well, the double taxation treaty between these countries declares that the funds from a UK pension plan withdrawn by a US national are only subject to taxes in the USA.
That too, the 25% lump sum is exempt from any type of tax in the US. Other taxable income is to be declared to the IRS.
Transferring into a 401(k) plan
Another aspect to consider over here is that a person could not be able to transfer their UK pension into a 401(k) pension because of the rules set by HMRC.
An alternative for that is to transfer your pension into another UK pension scheme, for which, the process is very simple and there are no tax implications.
UK SIPP for a US citizen
For the people (other countries’ residents), who have worked in the UK for a specific period, there is a possibility of accumulating a private pension in the UK. In such cases, the pension plan can be transferred according to the pension freedom act.
- For those who are still living in the UK, this can be transferred into a SIPP
- For those who are living in the EEA (European Economic Area), it can be transferred into a QROPS (Qualifying Recognised Overseas Pension Scheme) with a Malta trust.
- For those who live in any other country, in this instance the USA, this can be transferred into an International SIPP.
An international SIPP is the same as the UK SIPP while being specifically designed for the people who no longer live in the United States.
Almost all the features are the same such as flexibility of withdrawals starting from an age of 55, regulated by FCA, best protection for your investment assets, etc.
The only major issue here is that most institutions offering SIPPs won’t accept US citizens to have a SIPP because of the complexities such as additional reporting that are required by the IRS.
However, we are saying that most institutions won’t offer, yet there are some providers available that offer SIPPs for US citizens. While choosing a provider, a person should be attentive to the cost, reputation of the provider, and the services.
An international SIPP (iSIPP) is often considered to be the best option for people living outside of the UK or EU. With the help of an iSIPP, a person gets access to a wide range of investments including those provided below.
– Cash
– Deposit Accounts
– Exchange Commodities
– Listed Shares
– Fixed-income assets like government/corporate bonds
– Mutual Trusts
– Mutual Funds
– Investment Trusts
– REITs (Real Estate Investment Trusts)
– Commercial Property Investments
– National Savings Funds
– Alternative Investments
While creating a portfolio, it is highly recommended that you should be highly attentive to the asset allocation and do it based on factors like risk tolerance, your age, your wealth, investment strategies, etc.
If done hastily, investments could lead to potential risks where you might even be subject to huge losses including loss of capital.
It is best to opt for a personal investment planner like us to take care of all your needs regarding portfolio creation and investment management.
Coming back to the iSIPPs, retiring outside of UK while you used to be a UK resident could pose many problems including currency exchange risks. iSIPPs allow you to invest in many types of assets with the advantage of many currencies.
The effect of currency exchange flexibility and a good investment choice would allow you to have robust returns on your capital, which would come in handy during your retirement.
For more information on International SIPPs, you can click here.
Now you know how to have a UK SIPP as a US citizen/resident. However, we haven’t discussed who are the best providers for choosing an iSIPP. Therefore, let us have a peek at some of the top iSIPP providers available.
Given below is a table that consists of the data regarding the best iSIPP providers.
| Provider | Account set up fee | Transfer fee (inward) | Annual fee | Transfer fee (other UK pension plans) |
| My Expat SIPP | £0 | £50 | £150 | £75 |
| Forthplus SIPP | £400 | £0 | £400 | £0 |
| iPensions (Momentum) Adviser SIPP (up to £1 million) | £300 | £0 | £500 | £500 |
| iPensions (Momentum) Adviser SIPP (£1 million to £1.5 million) | £300 | £0 | £1,000 | £500 |
| iPensions (Momentum) Adviser SIPP (£1.5 million to £2 million) | £300 | £0 | £1,500 | £500 |
| iPensions (Momentum) USA SIPP (up to £1 million) | £300 | £0 | £500 | £500 |
| iPensions (Momentum) USA SIPP (£1 million to £1.5 million) | £300 | £0 | £1,000 | £500 |
| iPensions (Momentum) USA SIPP (£1.5 million to £2 million) | £300 | £0 | £1,500 | £500 |
| PSG Harbour International SIPP | £399 | £75 | £399 | £499 |
| Sovereign International SIPP | £300 | £0 | £500 | £250 |
| STM International Pension Plan (Fixed Rate) | £150 | £0 | £550 | £860 |
Bottom Line:
Finally, you are now aware of the details regarding how you can have a SIPP while being a US citizen/resident.
However, that’s just not it. You must have a professional financial advisor to help you with the investments available within an iSIPP.
For that, you don’t need to search elsewhere because we offer you the best financial services that are not only related to an iSIPP, but also related to general financial planning, investment management, and wealth management.
However, if you want to opt for the services of a financial advisor somewhere else, then no problem. You must, however, consider choosing the best professional based on aspects like fees, reputation, etc.
If you are a person busy with your daily activities and don’t have enough time to take care of your investments, then we got you covered. We have been in the industry for quite some time and have been helping individuals by providing them with various financial and investment services.
So, if you want to acquire the best-in-class financial services offered by us, then click here.
That being said, we hope that this article came in handy for you in finding the necessary information for which you have been searching. We also wish you nothing but the best with all your investments while having maximum returns.
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