Moving to the US? Don’t forget your SIPP!
Moving to the US? Don’t forget your SIPP!
Relocating to the US and SIPPs
UK citizens with SIPPs who move to the US will be used to hearing “no” when it comes to dealing with their personal pension. Many of the UK’s biggest SIPP providers won’t work with American residents, even if they have spent most of their working lives in the UK. The same is true of many UK investment managers. Similarly, US investment managers are unfamiliar with UK pension schemes. It is not possible, for example, to transfer a UK pension into a qualified US pension plan.
The risk of a neglected SIPP
This can leave professionals and executives who move to the US in a quandary. In some cases, they may resort to the highly unsatisfactory solution of not telling their SIPP provider that they have moved to the US. It is important that any financial institution with which you hold an account has accurate details of your tax residence status for its own tax and regulatory obligations. For SIPP accounts, it also raises a number of problems that can affect the investor and be difficult to correct later. For instance, if the SIPP manager is unaware the beneficiary has become a US resident, they could make investments or pursue an investment strategy that is no longer appropriate. Indeed, the manager may not even be aware of rules that apply to US residents. This is a perilous situation to be in, especially if the SIPP represents an individual’s primary source of retirement funds.
US tax reporting
There’s another headache for SIPP holders who move to the US: US tax reporting.
US residents have to declare all sources of income and gains to US tax authorities – and face the risk of penalties if they don’t. This can be particularly complex in the case of SIPPs, as there are additional information reporting requirements depending on the structure of the SIPP. Many providers employ a trust structure, which can trigger these additional IRS requirements. This is something the investment manager also needs to be familiar with.
By default, the IRS does not automatically recognise a trust-based SIPP as a pension structure entitled to favourable tax treatment. This situation can be avoided by applying the relevant provisions of the UK/US Double Tax Treaty when filing the individual’s annual US tax return, protecting its tax-advantaged treatment. However, there are rare situations where a preferred tax outcome might be obtained by not adopting this tax treaty relief. The determination will generally need to be made by an accountant with experience of US tax reporting, as well as UK SIPPs.
An additional complicating factor is the different treatment of SIPPs by different US states. This could, for instance, mean that dividends within a SIPP are subject to state taxes – even if they are exempt at the federal level. Depending on an individual’s portfolio and circumstances, this could necessitate a change in investment strategy.
Similar issues impact Americans who relocate to the UK and join a UK pension scheme.
UK and US accountants Frank Hirth have advised many SIPP holders moving to and living in the US. Director Alex Jones says: “the reporting of SIPPs to the US tax authorities can be complex. We always advise clients to take the time to get it right. They may need the assistance of the pension trustees as well as those managing the underlying investments to generate the right information. Failure to do so can lead to significant value-driven reporting penalties. The US tax system can appear daunting, but with a little planning, and the right team managing the investments and reporting requirements, it is generally very manageable.”
How can Schroders help?
Schroders Wealth US is uniquely positioned to help. Unlike many UK wealth managers, we are committed to providing investment services for US residents and those subject to US tax reporting.
We have long experience of managing SIPPs for UK citizens who relocate to the US and would be delighted to discuss how we can assist you. We understand the issues involved in this scenario and, where required, can make introductions to tax advisers and accountants with whom we work closely.
We are well equipped to provide ongoing investment management within a SIPP. Our investment process is tailored to avoid the tax-traps that can arise when investing for those subject to US tax. We construct portfolios working closely with our in-house equity and fixed income specialists, who draw on the research capabilities of the broader Schroders group. We are also able to manage SIPP portfolios in sterling or US dollars depending on which is the most appropriate currency for the client’s circumstances.
Jonathan Lochery, Director of I.P.M. SIPP Administration Ltd said: “As a specialist in providing SIPP administration for Americans and US residents for over 15 years, it is important for us to work with an investment house, such as Schroders Wealth (US), that has experience and expertise in managing SIPP funds for US clients to enable us to provide the required bespoke solution. This allows clients, should they wish, to invest in a dollar-denominated approach. They can receive pension benefits in dollars removing the cost and risk of unnecessary foreign exchange transactions."
Case Study – How we helped a UK-domiciled executive moving to the US
Our client is a UK-domiciled executive in his mid-50s. After running the European division of a global consumer business, he was appointed to a management role in New York. At the time, he had a SIPP worth approximately £4 million. The SIPP was managed by our sister company Cazenove Capital, which had also successfully managed a taxable portfolio for the client for a number of years. After accepting the New York role, Cazenove Capital referred the client to Schroders Wealth Management (US) Ltd as we have a SEC licence and the experience and knowledge of the SEC and tax rules affecting a US person.
The client’s accountant had explained to him that his SIPP would need to meet both US and UK tax and pension requirements. This usually presents a number of difficulties for UK investment managers. Many popular funds in the UK – including ETFs and actively managed funds – are classified as Passive Foreign Investment Companies (PFICs) in the US, attracting punitive taxation. Meanwhile, many popular US funds do not meet certain criteria required for UK pension investments. It was clear that the client’s portfolio would need to be restructured to meet these new requirements.
The client appointed Schroders Wealth Management (US) Ltd to manage his SIPP. We were able to on-board the portfolio quickly and efficiently, working with existing advisers as necessary. To meet UK and US requirements, we invest for the client primarily in individual stocks and bonds. Previously, the SIPP had also included actively-managed funds and ETFs. In the two months before the client’s move to New York, we transitioned the portfolio to the new approach, drawing on the expertise of our equity and fixed income specialists. The portfolio has since performed very strongly.
Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.
This article is issued by Schroder Wealth Management (US) Limited, a firm authorised and regulated by the Financial Conduct Authority and registered as an investment adviser with the US Securities and Exchange Commission. Registered office at 1 London Wall Place, London EC2Y 5AU. Registered number 10761882 England. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Schroder Wealth Management (US) Limited unless otherwise stated. For your security, communications may be recorded and monitored.