Navigating the intricacies of retirement planning, particularly for those with connections to both the US and UK, demands a nuanced understanding of the differences in pension structures and tax implications between the two countries. It is essential to recognise key characteristics, plan types, and financial strategies to optimise retirement savings and income.
Retirement planning first requires a thorough grasp of fundamental definitions and the structures of available options in both the US and the UK. While American ‘pensions’ typically refer to employer-sponsored plans providing a guaranteed retirement income, ‘retirement plans’ more commonly describe defined contribution options such as Individual Retirement Accounts (“IRA’s), where the onus is on individuals to manage their investments. Conversely, in the UK, ‘pensions’ is an umbrella term encompassing most retirement schemes such as workplace and personal pensions, which also benefit from tax-deferred growth and contributions relief. Notably, the UK does not offer US Roth-style plans, but the tax-free status of US Roth accounts is generally recognised under the US-UK tax treaty.
Similar to the US 401(k) and 403(b), UK workplace pensions can receive regular contributions from both employees and employers, sometimes with additional matching opportunities. In the UK, employer pension contributions are typically provided as an additional benefit on top of your annual salary. In contrast, in the US, employer pension contributions are included as part of your agreed salary.Defined benefit pensions, while increasingly rare, are still present in both countries.
A popular UK retirement plan, the SIPP, offers a wider range of investment choices and flexible options, similar to US IRA accounts. SIPPs enable the consolidation of previous pensions pots and greater control over investment decisions, although they may require additional US tax reporting.
Retirement contributions must adhere to statutory limits to maximize tax advantages. In the US, annual employee contributions to common employer plans such as 401(k)s are capped at USD 23,000 (2024), with an extra catch-up contribution available for those aged 50 and over. Additionally, individuals can contribute to IRA accounts subject to certain conditions. In the UK, the annual allowance for personal pensions is capped at GBP 60,000 or 100% of annual earnings, whichever is greater, including employer contributions, with the allowance tapering for high earners.1
Each country has different rules regarding when retirement benefits can be accessed. In the UK, typically the earliest age to access pension funds is currently 55, increasing to 57 by 2028. Conversely, in the US, while individuals can access their retirement savings at any time, there are generally penalties for early withdrawals before age 59.5. Importantly, your residency will also play a crucial role in deciding on how retirement benefits are taxed.
To optimise retirement planning before relocating to the UK, consider consolidating your accounts for easier management, and explore how Roth IRA conversions might benefit from favourable tax treatment in both the US and UK. Conduct financial modelling and carefully review your contributions to avoid penalties.
Planning for retirement across different jurisdictions requires navigating complex regulations and making well-informed financial decisions to maximise benefits. It is crucial to manage these complexities and seek professional advice to ensure a secure and comfortable retirement. At LGT Wealth Management US, we draw on our extensive experience both in assisting clients and from our own personal relocations to the UK, enabling us to expertly navigate the numerous intricate aspects of such transitions. To find out more, read our full guide “Moving to the UK: a guide for US expats”
[1] These limits are correct as of 4 December 2024 but are subject to change in the future.
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