UK pension scheme auto-enrolment issues for US clients
This post was written by guest contributor David Dodds. David is a Chartered Financial Planner with Blacktower Financial Advisors Ltd.
All companies will be required to provide and enrol their UK based employees into a pension scheme by October 2018, which could have serious tax implications for US connected individuals, depending on the type of scheme they are enrolled into. Companies must provide a Group Personal Pension Scheme (GPPS), an occupational company pension arrangement, or the Government’s NEST (National Employers Savings Trust) scheme.
Many companies are choosing to provide their employees with a GPPS. Once in such a scheme, their pension contributions would normally be invested in a default insurance company managed fund, and it is this that could have tax implications for Americans.
All UK pension schemes have implications, from a US tax point of view. However, GPPs, which are usually held with insurance companies whose ‘mutual funds’ are considered to be PFICs (Passive Foreign Investment Companies) from a US tax perspective, pose an even greater risk for US purposes. When these funds are reported on the US tax return of the individual, any money invested in such funds may be subject to substantial US income tax unless the appropriate pension treaty claims are made.
Therefore, there is a danger that due to the requirement for all employees to be auto-enrolled into a pension scheme, any Americans working in the UK could be unwittingly entering into a pension arrangement which creates additional tax liabilities and reporting obligations for them. It may be advisable for them to opt out of their employer’s GPPS, but this would result in the employee potentially losing the benefit of their employer’s pension contributions. They may therefore wish to discuss the option of the company paying contributions into another type of pension scheme instead, for instance a Self-Invested Personal Pension Scheme (SIPPS), which can comply with US tax regulations.
It is essential that any US connected individual working in the UK seeks the appropriate advice to ensure that they are not entering into a pension arrangement which creates unwanted tax liabilities for them.