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Completed transfer out of my UK Defined Pension Scheme

Completed transfer out of my UK Defined Pension Scheme

Old Apr 11th 2019, 7:24 pm
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Having gone through the process, I can confirm that regulated financial advice is required, from a UK approved Financial Adviser

The process was pretty extensive, taking a look at my net worth and running range of retirement scenarios, and ensuring I was fully aware of the risks. (I'm guessing the process was no different from a UK resident going through this)
I can't recall the specific charges - but there was an initial assessment fee - £ 1,500 sounds about right, then there was a percentage charge of the transfer value at the time of transfer (which could be taken from the transfer value itself).
The whole process took about 6 months, with lots of form filling - so not trivial by any means.

The IFA was comfortable with the approach I took given my circumstances. My transfer value was enough to make the hassle worthwhile, but not such a big component of my overall retirement that it was unduly risky for me. The lifetime allowance for UK pensions was not a problem for me - but certainly a consideration depending on the amounts involved, As a side note, I think you are able to insist upon the transfer, even if the adviser thinks it would not be in your interests; but this never came up in my case.

The easy part is getting a transfer value quote from the DB scheme - which I'm guessing is the first step for most people contemplating this; be aware that you may only be able to request this once a year, and the quote given is a guaranteed value for a limited amount of time (I think it was 60 days)
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Old Apr 11th 2019, 9:10 pm
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Originally Posted by Wirksworth View Post
There are at least 2 reasons to transfer out of a defined benefit from a UK perspective ( and also reasons not to - primarily being one then takes the investment risk) - 1 The transfer sums offered since bond yields went so low have been high - can be as much as 40X the DB pension. 2 A SIPP can be transferred on death very tax efficiently depending on the age at death. It is most tax efficient to die before the age of 75 !. I am not in a position to say how the Tax element works for a US resident or citizen and no doubt it will be complex.
Before I did a transfer like that, I'd want to know if a UK SIPP offered the same tax advantages to an inheritor as do a US IRA or Roth IRA. I can see taking on investment risk in exchange for inheritance ability, but not so much if there isn't a tax advantage.

Last edited by Giantaxe; Apr 11th 2019 at 9:16 pm.
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Old Apr 11th 2019, 11:35 pm
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Giantaxe; I'll confess My inheritance calculation was not particularly nuanced:
- Transferring Out of Defined Benefit to SIPP: Offspring receive a tidy sum after parents die (and probably some tax headaches, the poor wee things)
- Keeping DB Scheme: Offspring get sod all after parents die
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Old Apr 12th 2019, 6:34 am
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Default Re: Completed transfer out of my UK Defined Pension Scheme

I spent my very first year after graduating college working for a company with a DB pension scheme. Forgot all about it. The company chased me down via DWP just recently and told me the value of my pension is around 10k. Not bad for an investment of less than 1k all those years ago! They still offer the DB scheme to current employees - very rare these days. In fact it is the only company in my entire career that has offered one.
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Old Apr 12th 2019, 6:51 am
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Hi Kevin

Still in the Bay Area?
How's your daughter?
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Old Apr 12th 2019, 6:53 am
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Yep, still in the bay area. Daughter is doing well. She just got back from the big DC trip over spring break, and had a blast.
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Old Apr 12th 2019, 6:56 am
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Company paid for flight out (as mandated by H1B) and one week of accommodation, and that was it.

I came out with the mindset I would try it out for 3 years, and then head back to Blighty. After I completed my first year, my employer offered to start the green card application process, and I turned it down.


Mandated by H1B..I didn't know that. Thanks for adding to the body of knowledge.

You turned down a Green Card?
Why?

Last edited by Hotscot; Apr 12th 2019 at 7:00 am.
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Old Apr 12th 2019, 7:00 am
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Actually I think I might have that wrong - I think return flight was mandated by H1B. Makes more sense from the US immigration perspective.

I did initially turn down the green card. But I took up the offer from my 3rd employer, by which time I was on the second block of 3 years for the H1B.
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Old Apr 12th 2019, 7:04 am
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Why would you turn down a Green Card application though?
And who mandates a flight on H1B?
Just adding to my body of knowledge.
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Old Apr 12th 2019, 7:11 am
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Don't mean to hijack OP's thread.
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Old Apr 12th 2019, 7:15 am
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Of course.
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Old Apr 12th 2019, 4:58 pm
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Originally Posted by 5HoursBehind View Post
Giantaxe; I'll confess My inheritance calculation was not particularly nuanced:
- Transferring Out of Defined Benefit to SIPP: Offspring receive a tidy sum after parents die (and probably some tax headaches, the poor wee things)
- Keeping DB Scheme: Offspring get sod all after parents die
That's true. Otoh, the "cost" of the ability to inherit is that you are taking on investment risk. And, I presume, longevity risk?
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Old Apr 12th 2019, 11:38 pm
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Default Re: Completed transfer out of my UK Defined Pension Scheme

That's fair - Both investment risk and longevity risk. It seems The DB schemes are only able to invest very conservatively, so typically it's easy to beat their returns in all but the most severe of markets
As for outliving my money, I find this model helpful but rather sobering https://engaging-data.com/will-money-last-retire-early/ when I run my numbers through, I'm way more likely to die before running out of money.
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Old Apr 20th 2019, 10:57 pm
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Now I am done with the transfer, and tax forms, I thought it might be helpful to summarize this post to collate some of what I learned along the way (much from experts on this forum - thanks as always); could save someone else some time if they are contemplating.
BTW; I have zero qualifications in this area, everything below is my opinion, no matter how factually stated
As a US resident/citizen, can I transfer out of a UK defined benefit pension (DB) scheme?
Yes, this can definitely be done, subject to the policies of the DB scheme holder. I transferred to a UK based Self invested Personal Pension (SIPP). The route you will take largely follows the steps of a UK resident, but there are extra hurdles to clear. (transfers to other schemes such as QROPs, or to US pensions have been debated elsewhere - I have no experience of these, but by reputation: 'Here be Dragons')
Should I transfer out of my UK defined benefit pension (DB) scheme? Think long and hard before doing this, you are swapping a 'guaranteed' future income for a specific cash amount (the transfer value), essentially assuming all risks for managing this cash value to provide for you & yours in retirement
Possible reasons for transferring out (not exhaustive) :
  • Inheritance planning (this was my reason); my DB provider would reduce payments by 50% to my spouse after I died, and then cease payments altogether upon her death. I transferred to a UK based SIPP, which allows transfer to our offspring when we both die. I'm planning to rely on our Stateside savings to fund most of our retirement;
  • Concerns about the financial position of the DB provider. If the company where you acquired the DB pension is in a dodgy position financially, or you have other reasons to worry that the Company will not be around when you come to collect, you might elect to take on the risk of managing the money yourself, somewhere where you can keep an eye on it (hence the use of quotes around the word guaranteed above)
  • High Transfer Value: Depending on market conditions, and the position of the DB holder, you may receive a disproportionately high transfer value in relation to the guaranteed payout
  • Early access to cash - you can withdraw from your SIPP from age 55 (though be aware there are US tax implications); Think extra hard before doing this, Life shortening illness perhaps? dire financial circumstances? Also be aware some DB pensions may also offer payouts from 55 (at the expense of reduced long term benefits). You can also contact the pension trustees, who may have discretionary scope to help with your circumstances. Suspect your financial advisor would not be supportive of this approach
How to do it?
  1. Contact your DB provider to obtain a 'Transfer Value' of the pension, and a copy of the pension scheme policy. Consider both in detail to establish whether a transfer out makes sense for you.
  2. If your transfer value is greater than £30,000, the receiving scheme will require you to receive financial advice from a UK registered financial adviser. If you don't have one already, you may have to contact a large number to find someone who is prepared to take on US-based clients (anecdotally, this is due to insurance for financial advisers not covering overseas clients - though I heard this may have improved recently). Understand their fee model for the transfer - there's a lot of work involved, so unlikely to be cheap - this may in itself affect your decision to proceed
  3. Contact a UK-based SIPP provider to find one who will accept overseas clients (hint - AJ Bell is currently the only one who appears to support US clients, it also appears to be well regarded. I used them -very efficient)
  4. If the stars are aligned, work with your Financial Adviser to initiate their due diligence, prepare to fill in lots of forms to establish your overall financial position and goals, and ultimately transfer the pension. This took 6 months start to finish for me. The financial adviser will come to a recommendation on whether they support your transfer. If they don't, they may still allow you to push through as an 'insistent' client, but by my research, they are not obliged to support. (Hint - get your cogent arguments lined up in advance if you are determined to make the transfer)
How to report it (to the IRS) (Fair warning: I took no professional advice on this, I think I took a middle of the road approach, but these are just my unqualified opinions)
On form 8938: Assuming you are above the well documented reporting thresholds, you absolutely need to report the DB scheme annually on your tax returns via this form (plus any and all all your overseas accounts) . If you have not been doing this in previous years, suspect you would be seriously pushing your luck by initiating a transfer (for the pedants, perhaps there's an argument that DB pensions are generally declared with zero value, and if this was your only UK asset, then you might avoid declaring, but to then convert it to a SIPP with declarable value and suddenly start reporting it would seem like a high risk strategy)
On FBAR : Again, assuming above thresholds, report the DB scheme and any other foreign accounts via FBAR, If you haven't been doing this annually, forget about transfers and deal with that first

When you transfer to the SIPP, continue reporting via both forms (I entered the old and new names and account numbers in the same section of the form, with the new address).

I took my time (several years) contemplating the transfer out,I got a transfer value several years ago, and yearly thereafter. I reported the transfer value of the Pension as its value on both the 8938 and FBAR (instead of 0, which is typically recommended for DB schemes). My rationale was that this would look less alarming than having a DB pension suddenly switch from a zero value to a large sum. In hindsight, just a naive notion on how the IRS works, I have no idea if this has any bearing. As a side note, my transfer value increased substantially each time I got the quote; I couldn't get details on how these values are calculated, which might have allowed me to optimize transfer timing - just the last offer was one I couldn't refuse.

Form 8833
More controversial, this form allows you to explicitly specify a treaty position (based on the UK-US tax treaty). The argument goes that you may need this form to ensure the transfer between schemes is not treated as a distribution
this is the main substrate I used to decide whether to submit:
  • Here's the actual treaty (It's not the worst read in the world, actually it feels suspiciously like it was put together over an extended Friday afternoon pub lunch): https://www.treasury.gov/resource-ce...s/uktreaty.pdf
    • read article 18, para 1: income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme).
  • IRS rules on treaty positions: https://www.law.cornell.edu/cfr/text/26/301.6114-1 - see section c(iv) - appears to specifically exempt pensions from treaty reporting (also a footnote in the 8833 form itself specifies this)
  • Read Jugdish's anecdote about guidance from the US Embassy (towards the bottom of the thread) - generally supports the notion that normal folks don't need to worry about this form https://talk.uk-yankee.com/index.php?topic=81730
  • Reading through this and a few other forums - as far as I can tell, no one has ever mentioned been taken to task by the IRS about their failure to apply the tax treaty in respect of a UK Pension; Like never. I think it's pretty likely that someone would have posted a question along the lines 'hey, I've been collared by the taxman, and they want to know why I didn't take the correct treaty position on my UK pension' (If anyone has heard of this happening, please pipe up).
On balance it seems unlikely that the form is needed, however, it didn't seem too difficult to fill in: https://www.irs.gov/pub/irs-pdf/f8833.pdf , so I did.
Section 1, I specified article 18, Section 2 (irc's) , I left blank (ran out of time to work out which IRC's apply -if anyone knows, please post), Section 5, I answered no, Section 6, I wrote something to the effect:
'Pension was transferred between UK approved pension schemes' value $xxx reported form 8938, Para 1 of article 18 specifically exempts taxation of pension transfers'

Things I didn't do: declaring a distribution of the pension on my 1040, completing 3520 and 3520-A (these are awful forms, and I've seen no evidence they are required - I worry in fact that completing these forms might complicate my position further by recharacterizing my pension as something else) - again, just my opinion. Cook County posted a PDF earlier in the thread that is a very interesting read; in the end though, it seemed to me most of the cautionary notes therein reflected transactions not covered by a tax treaty (i.e. other countries - not UK/US)

That's about it; hope it helps someone; I'll post if there's ever any follow up for me;






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Old Apr 23rd 2019, 4:26 pm
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Default Re: Completed transfer out of my UK Defined Pension Scheme

Thank you 5hrsbehind, that is very useful
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