MMcD

Hello - I've just registered in this helpful forum in the hope that I might find a definitive answer to the following:

1.I'm a US citizen, resident in California
2.However, I have 3 different Private Pension Funds (known as"section 226" Private Retirement Plans) in the UK, all taken out in 1976 whilst living/working in England.
3.I wish to avail myself of the 25% lump sum "tax-free" withdrawal from each of my pension plans before converting them to Annuities (in the UK where the remainder of the funds MUST remain).
4.I need to know what the IRS (federal) and California (state) tax implications will be when I bring the lump-sum amounts into the States:
Given the UK/US relevant treaty....
Will the IRS here in the States honour their "tax-free" status?
I've read the relevant info in the US/UK Treaty (article 17) published on the IRS web site as well as a host of other indecipherable arcana - but nothing I've read provides a definitive answer - or if it does - I fail to grasp it.

I know I must and will pay tax on the periodic payments from the Annuities themselves once payments begin (as I would were I still living in the UK) - but I'm hoping that the "tax free" status of the 3 substantial lump sum amounts will be honoured by the IRS (and California) and that this money will remain tax-free when I bring it into the States.
Incidentally, I have no choice but to bring those funds here as I'm no longer resident in England, have no address there and therefore, am not allowed to maintain a UK bank account.
I would appreciate any guidance....thanks so much......

dbj1000

I'm somewhat confused by one of your final statements. I've not been resident in the UK for nearly 8 years, and I have multiple UK bank accounts, with my address registered here in the US. They even send me pointless statements periodically via snail mail from London.

MMcD

Hi dbj1000....

Hmmm....that's interesting.
Perhaps the difference is that my accounts were closed (Barclays Bank in the UK ) centuries ago when I moved back to the US.
And unless I'm wrong - I'd have to have a UK address in order to open a brand NEW account. And remember - I am an American citizen - which adds a further complication.
Of course this strays from the question to which I'm really desperate to find an answer: tax implications when I bring "tax-free" lump sum payments into US.....?????? I hope someone can offer some input.....

lansbury

The advice given to us was that the lump sum is taxable in the US. It matters not if you leave it in a UK bank or move it to the US, it is part of your worldwide income and must be declared.

On that advice, we didn't take the lump sum, on those pensions that paid out after we came to the US. As a US citizen, and resident, you can claim exemption from UK income tax and only pay US tax on the pension payments. Saves the hassle of claiming for the UK tax on your US tax returns.

MMcD

oh my....that's grim news if truly the case.
It also means that the US does not honour/recognize the status the UK accords the lump sum payment.
Seems to contravene the spirit of the treaty. But then...who said life was fair.

Would love to hear any other opinion about this matter.....and thanks so much lansbury for your reply.....

theOAP

It's generally accepted that a 'tax free' lump sum payment from a pension in the UK is taxed by the US.

Article 17 in the US/UK Treaty is the correct place to look. Government (public sector) pensions are covered by a separate Article. Beware of the phrase 'Notwithstanding'. It usually refers to the 'Saving Clause'. The Treaty indicates that many items are tax free, but NOT for 'US Persons' (USC, Greencard holder, etc.), because of the saving clause. The saving clause (Article 1(4) of the Treaty, I believe) states the US reserves the right to tax their 'persons', regardless of what the Treaty allows.

This can be a grey area. The IRS and professional tax advisors (the Big 4) argue points continually, and at times the IRS loses. Certain types of pensions may not fall to the savings clause, but you're looking at the fine details of the pension, and residence. Needless to say, only a professional advisor can answer your question accurately.

I did not take the 25% tax free amount and have larger monthly payments. I think I was correct in doing this, but I can not be 100% sure. I refused the tax free amount solely due to the US tax situation. My situation was complicated by an additional 'tax free' amount in the UK and allowable credits from Form 1116 (previous years). Each situation is different. To not take the 25% tax free lump sum is unheard of for a UKC (no US ties).

Additional:
The payment is taxed when you receive it, not when it's brought to the States (it's worldwide income).
I can not comment on the California tax situation.

celticgrid

If you do want a 'UK' bank account check out the International branches of UK banks, based in the UK offshore islands.

nun

+1

The OP should be aware that as a US citizen the IRS taxes their worldwide income, so having money in foreign accounts in no way protects it from the IRS. All gains and interest must be declared on your US taxes.

As far as the lump-sum payment goes it is free of tax in the UK, but is taxed in the US and presumably in CA as well. The critical factor here is the "lump-sum" nature of the payment. If you were getting regular payments from your UK pensions that were free of tax in the UK, they would also be free of tax in the US as Article 17, Paragraph 1(b) is NOT subject to the savings Clause. This is good to know as a US citizen living in the UK as it means that payments from US ROTH accounts are free of tax in the UK as well as the US. So if you are a US citizen with a long term plan to retire to the UK a good strategy is to use ROTH accounts for retirement saving.

Here is the relevant section from the explanatory notes to the US/.UK tax treaty

and

MMcD

If you do want a 'UK' bank account check out the International branches of UK banks, based in the UK offshore island

The above is a quote from celticgrids reply to me (I can't find the quote button on this page so don't think it will appear correctly when I hit "submit")
......I googled your suggestion.
The minimum account balance required to open/maintain such an account is out of the question for me.
Furthermore, aside from the fact that the pension companies are giving me a hard time over wire transferring my payments in dollars (the ONLY way my particular US account will accept int'l. wires) - I actually have no need or use for a UK (sterling pounds) account.
I want all funds in the States.
I'm not trying to hide or divert them.
I will willingly pay all taxes due on the Annuity Payments - just as I would have to do were I still resident in the UK.
I will bring the lump sum payments from the 3 different policies into the States as well.
I'm just trying to determine whether they are truly subject to tax here - since they wouldn't be in the UK - that's what's got me pretty dismayed and creates a tax nightmare should I wish to take all 3 lump sums within 1 tax year.

MMcD

Wow!!

I've just seen the replies from "the OAP" and from "nun"
I want to try to reference the relevant treaty, ingest the info you've both provided and attempt to decipher it's meaning..
I'll then respond more specifically with any questions I'm sure I'll have - but meanwhile I didn't want to not say a big + which means: I really appreciate your time/effort and input (even tho I don't think I'll be so happy with the "upshot").
A big THANK YOU for those quick detailed replys.
This is a GREAT forum

dunroving

I don't know about pension lump sums, but I think other income that is tax-free in the UK (e.g., ISA interest, maturing endowment policy) are taxable in the US.

I think I read somewhere that in these situations, the whole lot isn't taxable. For example, an endowment lump sum isn't all "profit". Also, I think when you determine what the "profit/income" is, I think you might only be eleigible for US tax on the proportional amount that occurred while you were living in the US. For example, if you move to the States in January 2009 and a 30-year endowment matures in January 2010, the majority of the profit/income occurred before the 12 months you lived in the US. Maybe your pension lump sum is similar? Worth getting some expert advice, I think.

lansbury

There is one other thing you need to consider, and that is the rate of tax you will pay on the lump sum in the US. If you bring over a large lump sum what will the percentage of tax on the amount be, as opposed to passing on the lump sum and having larger monthly payments.

One of ours the lump sum would have been taxed at a higher tax band for both federal and state tax, so we would have lost a higher percentage of that money to tax, than we did by having higher monthly payments taxed at the normal rate.

nun

Just a small correction. You pay US tax on the lump-sum when you take it, not when you "bring it over" as the US taxes it's citizens on their world wide assets and income. Taxation on a remittance, rather than arising basis, is a concept in UK taxation as taxation depends on residency status.

The point about incurring a large US tax bill because the lump sum might push you into the next tax bracket is a valid one.

Also the OP should look into the effect of these UK pension payments on their US SS as I assume they arise from non-SS wages and will result in a reduction in the OP's SS payments because of the Windfall Elimination Provision. Finally the OP should investigate if they qualify for some UK basic state pension as if they worked in the UK they will have paid UK National Insurance Contributions.

MMcD

Now that's interesting....I'll try to look into it.
Also I'd think premiums paid should () be allowed to be deducted in some way from those lump sums........
The "expert advice" you recommend I seek is a stumbling block - finding someone conversant with UK/US tax law, governing tax treatey and any other relevant mandates wouldn't be easy. Don't have a clue how to go about it. Ideally it should be someone reputable and licenced (CPA, CFP, CFA or an Attorney) who had already dealt with this issue in the past and whom I wasn't paying by the hour to 1st "educate" themself just in order to "get up to speed" etc. It seems this is such a "grey" obscure area, clouded by uncertainty.
I have a sense that the answer might just boil down to some of the info contained in a couple of the prior posts- which I haven't yet had time to ponder.

MMcD

Yes - one of the 3 policies definitely puts me into the next higher bracket. And combining the other 2 within 1 tax year is also dicey. Forgoing the lump sums seems out of the question as the periodic payments - given the horrific interest rates offered - are worse than paltry. It would take centuries for the annual Annuity payments to match the lump sum amounts ( I think )