Ebor24

I have been reading a fair number of posts on this topic as I am currently mulling over the process. My understanding so far is that the following hurdles have to be overcome.

• The Application Process
• Avoiding Double Taxation
• Declaring the pension on ones US tax form 1040
• The effects of WEP on social security benefits

Application

1. As one gets near pension age 65 request a State Pension Summary from HMR&C. This tells you how many qualifying years you have and an estimate of what you are likely to receive. This has proved fairly straightforward with excellent service by HMR&C

2. They sent me the State Pension Application Form IPC BR1 that included a section regarding payment into a US bank account. I have started to fill out this form to get an idea of the information needed. The form is about 20 pages and asks for a lot of detail on addresses and dates when I lived in the UK. I certainly can’t remember all of those in such detail. I hope they aren’t all necessary. Other information regarding work, family and military service etc. is not too difficult to provide.

3. They ask for a date when you want to start the pension. There are some advantages in deferring the pension, as it will increase although one has to calculate the pros of getting a bit extra with the cons of skipping the income for a year or more. One question I have is whether the pension is frozen once you receive it or is it indexed for inflation? Note that deferring the pension is also achieved by not sending in the application.


4. Possibly having to get a life certificate? I don’t know what this is for.



Double Taxation

This is where the complexity increases. In order to prevent double taxation the following steps are indicated

1. Complete Form US-Individual 2002 (Application for relief at source from UK)
2. Complete Form 8802 (Application for United States Residency Certification Form 6166)
3. Submit both of these forms to the IRS in Philadelphia together with a payment of $85 at least 45 days before date when Form 6166 is needed.

It seems from what I have read that the UK only needs one of these certificates of residency but it is less clear whether or not the IRS insists on an annual certification to be sent?

Form 8802 is not an easy form to complete based on my first appraisal. I have also read some comments indicating that one has to be actually receiving the pension before the UK will process the forms.


Declaring the pension on ones US tax form 1040

I have seen a lot comments on this mainly on where one declares the income. My understanding so far from this site and other sites is that

• The UK state pension is fully taxable as income
• It goes on line 16 and is treated as an annuity. It is not miscellaneous income on line 21
• The tax software packages available are not useful in this regard and it would seem that E-filing will be problematical



WEP

I have found this to be potentially the worst hurdle of all. Those lucky enough to have 30 years of substantial earnings don’t have to worry. Also if one has Class 3 voluntary contributions, as these are not included for WEP and so will reduce the impact.

In order to try and get an estimate of the impact of WEP I requested a National Insurance Statement, as it is the only way to get an idea of what proportion of the UK pension is affected by WEP. The statement provided a mix of information:

• The date of entry into the UK Insurance scheme
• The total number of credits from basically from birth to1975
• Years of Class 1 contributions after 1975 paid
• Years of Class 3 qualifying weeks (52 per year)

US form SSA-308 Modified Benefit Formula Questionnaire –Foreign pension is used to determine what proportion of the UK state pension is subject to WEP. Basically it multiplies the monthly pension by the ratio of non-covered work months (total months – voluntary contribution months) divided by the total months. Question is when is the start date? Is it the day one enters into the National Insurance scheme?

If anyone has recent direct experience with this process or has any suggestions and advice I would be very interested in hearing from them.

nun

You've got it pretty well covered!

For taxes you just enter the amount you received in the tax year on 1040 line 16 and I imagine generate a substitute 1099-R, a 4852 form. I'm not sure you can e-file with one of those.

For the NI/WEP calculation I'd just total up the number of months you paid Class 1 and Class 2 and the WEP ratio will be
(Class_1_months)/(Class_1_months +Class_2_months)

Hotscot

These things give me a headache.

I'm hoping when I'm back in the UK I can find a competent tax expert to manage this.


I don't mind researching and understanding all these processes but I'm concerned I would miss something or do something wrong.
(Although maybe by the time I retire, at least over a decade away, there will be detailed guides.)

In fact maybe with all the new reporting requirements Turbo Tax will create an International version.

theOAP

I just looked out the window, and a pig flew past!

robin1234

My wife started to receive her UK State Pension in 2012. Fortunately, the process was really easy!

The application looks long and daunting, but actually was really easy to fill out as not all sections applied. As for taxation, we didn't take any of the steps you detail, although we did read about them. They know she lives in the US and is a US taxpayer, so they pay her the gross amount without any tax withheld.

US tax; as nun describes. Amount is in Line 16, and I filled out a form 4852. I filed manually (old fashioned paper and pencil method) and the 4852 is perfectly straightforward.

WEP is not an issue yet, since we are both delaying taking SS for the time being.

Ebor24

Thanks, good to know I'm on the right track.

Ebor24

Thanks for the info. Can't imagine doing this without the ability to look things up on line.

Ebor24

You're probably right about that. I wouldn't hold my breath

nun

I just looked at the form and see that they want dates rather than number of months of contributions so if there are any gaps in employment it could get tricky. If not I'd just enter the dates you started and finished work in the UK and then the date you started and finished voluntary contributions.

mikelincs

The UK state pension paid to UK pensioners living in the US goes up in line with the pensions in the UK, something people living over the border in Canada are not too happy about as theirs is frozen

Ebor24

You are right having to enter dates is tricky. From my Nat. Ins. Statement i have a number of weekly contributions/credits from basically when I was born up to 1975. These presumably come from various jobs I had as a student in the summers and at college. I can work out the number of years from this but the dates are all over the place with huge gaps between work. I didn't start full time work in the UK until I left college in 1975.

Ebor24

Thanks, that's good to know

nun

I got 3 years of contributions from 16 to 18 just for being at sixth form college. If you got the same don't include them for WEP as they are not income related.

lansbury

+1 very easy.

Filled out form posted it back to the UK and three weeks later received a letter telling how much my pension was and when it would start.

Its paid tax free with no extra input from myself. I pay estimated tax quarterly in the US on my income, so I just add an amount to cover this pension. File the annual taxes, nothing more to it.

Don't claim SS yet but windfall tax is what it is. At the end of the day I'll receive some SS and what I get is what I get. I wouldn't say it's complex at all.

JAJ

Or you can enter it as other income and then there is no need for form 4852. Since it makes no difference to tax payable, I doubt there would be any complaint from the IRS.