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25% UK pension tax free element

25% UK pension tax free element

Old Aug 18th 2021, 2:27 pm
  #16  
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Default Re: 25% UK pension tax free element

Originally Posted by scarey340 View Post
Thank you for clarifying that. So I’m definitely a US tax resident and will need to work closely with a CAA in the UK to coordinate moving money.

Thank you for the advice relating to not abandoning my GC, I’m back and forth monthly so no issue there.

One more thought, if I were to use my 25% tax free pension withdrawal to pay off my mortgage, what would be the position with my UK savings which are currently in an offset account with my building society?
Currently, I owe around £230k and my savings are around £170k. My tax free amount from my pension withdrawal tax free will be about £260k, therefore, if I were to draw that next year and use it to clear the mortgage, I’d have around £30k left which would be taxable in the US, what would be the situation with my £170k savings?
I am of course willing to pay for this kind of advice and will do so, I just wondered if anyone has any experience to offer?

much appreciated
If you are a US tax resident any UK pension payments are going to have to be declared to the IRS...so if you take the single 25% payment many people feel that you will have to pay US tax on all of it. Is your pension a DB or a DC plan? If it's a DB plan with a lump sum option it might be simpler and cost you less in tax to take the higher DB payment and not take the lump sum at all. Any interest and gains from your 170k savings after you became a US tax resident will also be liable for US tax, but you can offset that bill with any UK tax you have to pay. You will also have to look into FATCA reporting. Are these savings in cash or something like a S&S ISA?
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Old Aug 18th 2021, 2:40 pm
  #17  
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Default Re: 25% UK pension tax free element

The tax issues are not associated with bringing money TO the USA. Now that you are subject to US taxation you have to pay tax on all income (earned, savings, pension, interest, dividends, rent, etc) regardless of where in the world you live. Therefore, unfortunately, because you are now subject to US taxes your pension lump sum is no longer tax free to the IRS. It does not matter how you use your lump sum, the IRS will tax the entire 260K.

There are a couple of strategies to avoid this. Nun outlined the "non lump sum” approach but be aware that the vast majority of tax professionals will state that argument is not valid so I would be very careful of that one but nun does suggest a strategy to test the waters. If you go that route you would have to extremely careful how you declare your position on your tax return.

To minimize tax you could also drawdown the pension over a period of years to minimize the tax hit, meaning that if you take the 260K in one year you will be subject to very high taxes whereas if you take it in smaller chunks over a period of years you will likely pay a lower tax rate if you manage your total annual income, and if you are careful avoid the many additional taxes associated with higher incomes such as higher Capital Gains Taxes, Obamacare Net Tax and other gotcha’s.

If your savings are in a regular building society account then you should have no issues there other than paying tax on the interest. If you have anything in shared investments like OEICs, Unit Trusts or Investments Trusts then you have a whole other set of tax issues to look into. Google PFIC taxation to get an overview of the issues.

You may be subject to tax when you pay off your mortgage, see the comments further up this thread.

For anyone else reading this, the thread highlights the importance of getting tax affairs in order BEFORE becoming subject to US taxes. There is no grace period to go back and fix things.
Not doing so can result in paying significant taxes to the IRS that could have been otherwise avoided.


Last edited by Glasgow Girl; Aug 18th 2021 at 2:48 pm.
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Old Aug 18th 2021, 2:47 pm
  #18  
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Default Re: 25% UK pension tax free element

Hi Nun,
Thanks again for your reply.

My pension is a DC pension. The £170k savings are held in an offset mortgage account so they don’t earn any interest as such but they reduce the interest I pay on my mortgage.

Im looking into the FATCA regulations now. Thank you for that.
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Old Aug 18th 2021, 5:57 pm
  #19  
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Default Re: 25% UK pension tax free element

Originally Posted by scarey340 View Post
Hi Nun,
Thanks again for your reply.

My pension is a DC pension. The £170k savings are held in an offset mortgage account so they don’t earn any interest as such but they reduce the interest I pay on my mortgage.

Im looking into the FATCA regulations now. Thank you for that.
You need to review FATCA form 8938 and FinCen Form 114 (FBAR). https://www.irs.gov/businesses/compa...r-requirements

Concerning your lump sum I refer you again to this thread: https://www.irs.gov/businesses/compa...r-requirements at post #97 you will find someone who successfully did not pay US tax on his lump sum
These lawyers may also be of interest on this specific matter: https://www.castroandco.com/blog/201...distributions/ I have no connection with them!
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Old Aug 19th 2021, 3:30 pm
  #20  
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Default Re: 25% UK pension tax free element

Originally Posted by Glasgow Girl View Post
The tax issues are not associated with bringing money TO the USA. Now that you are subject to US taxation you have to pay tax on all income (earned, savings, pension, interest, dividends, rent, etc) regardless of where in the world you live. Therefore, unfortunately, because you are now subject to US taxes your pension lump sum is no longer tax free to the IRS. It does not matter how you use your lump sum, the IRS will tax the entire 260K.

There are a couple of strategies to avoid this. Nun outlined the "non lump sum” approach but be aware that the vast majority of tax professionals will state that argument is not valid so I would be very careful of that one but nun does suggest a strategy to test the waters. If you go that route you would have to extremely careful how you declare your position on your tax return.
The strategy to avoid having the 25% UK tax free amount taxed in the US is to make sure it is shown as income from a pension and not a lump sum distribution. By doing that it falls under Article 17.1 and not 17.2 which means that the savings clause can be avoided and any portion of the payment that is tax free in the UK should also be tax free in the US. If you take the 25% partial distribution out over a number of years then the argument for it being periodic pension income is even stronger.
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Old Aug 21st 2021, 8:39 pm
  #21  
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Default Re: 25% UK pension tax free element

Thank you Nun,
im speaking with two CAAs in the UK next week and one attorney in the US.
I’ll report back their views
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Old Aug 24th 2021, 11:00 am
  #22  
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Default Re: 25% UK pension tax free element

Originally Posted by scarey340 View Post
Thank you Nun,
im speaking with two CAAs in the UK next week and one attorney in the US.
I’ll report back their views
That will be interesting.
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Old Aug 24th 2021, 12:14 pm
  #23  
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Default Re: 25% UK pension tax free element

As I say, I’ll report back at the end of the week.
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