nun

OP is "Original Poster"

I think your initial question has been answered ie the lump sum from the UK pension is taxable in the US. However, you are now running into the exact tax and FBAR liability of your UK pensions. I think you really need to contact a professional to sort this out. If the pensions are personal rather than company sponsored they may well fall under FBAR and how they will be taxed will depend on how you dealt with them on your US taxes since they were set up, either declaring your and your employer contributions and paying tax on the gains as they arose or invoking the tax treaty.

zebrastripe

I am a US and UK dual citizen married to a UK national/US permanent resident and both of us reside in the US. We both worked in the UK and are both eligible to receive a lump sum from our UK pensions (mine is a personal pension from self-employment and my spouse has a pension from his employer and additional voluntary pension contributions (AVCS)).

As a US citizen I had always concluded that if I were to take a lump sum from my UK pension it would be taxable in the US. Based upon the savings clause in the US/UK double tax treaty, I also concluded that my UK national/green card spouse residing in the US would likewise be taxable on a lump sum from his UK pension. My only lingering doubt as to my spouse is due to the following excerpt from HMRC's DT19876A Double Taxation Relief Manual on the topic of the new lump sum provision added to the US/UK tax treaty, which states:

"The provision preserves the exemption from taxation from income tax of a lump sum relevant benefit where it is paid by a UK approved pension scheme to a beneficial owner who is a US resident. However, Article 1(4) will apply in respect of US citizens as the provisions of Article 17(2) are not amongst those listed at Article 1(5). So the US are able to tax lump sums received by US citizens from UK schemes."

Link: www.hmrc.gov.uk/manuals/dtmanual/dt19876a.htm

Is it the case that when HMRC refers to the preservation of the tax free status of a lump sum in the case of a "US resident", HMRC does not mean a US permanent resident?

In contrast to HMRC, the Office of the Chief Counsel of the IRS states on the last page of Memorandum Number AM2008-009 quite clearly:

"Thus, the savings clause would permit the United States to tax a lump-sum distribution to a U.S. resident from a U.K. scheme."

Link: www.irs.gov/pub/irs-utl/am2008009.pdf

Any comments on the HMRC excerpt would be appreciated, since it really confused me the first time I encountered it!

nun

This is saying that the lump sum payment is free of UK tax.

This notes that the saving clause allows the US to tax a lump sum payment received by a US citizen. It is not quite a complete description of the situation as it does not mention that the US will also tax a UK tax free lump sum pension payment received by a US resident.

How did/do you deal with your contributions and gains in your personal pension plan and how does your husband deal with his UK employer pension now that he is US resident? I ask because it's an area of some debate and confusion.

jjmb

been reading through this thread with interest as we have a couple of pensions in the UK (another 10 yrs before any of them mature) and an endowment due to mature in 2 yrs time. Giving the complications, this really should be US section on its own, rather than tucked away in the main section. Thanks for all the advice OAP and NUN

TexasPenguin

Apologies for resurrecting an old thread but I have a question with a slightly different "spin" on this and I'd appreciate any insight from those who have already trodden this path...

Mrs. TexasPenguin has reached the age where she can buy an annuity with the proceeds of a small UK pension (30K GBP). Aviva, the provider, has sent her the usual quotes including the 25% "tax free" initial payment that they have naturally assumed she will want.
Well, remembering this and similar threads I duly "advised" her that she wants to get quotes without this 25% since she would be taxed on this in the USA.

The bizarre thing is that, when I do the math, even if she elects to take the 25% and pay the IRS their slice, she would still have to live to one helluva ripe old age to have made that decision a worse deal than simply taking all of the pension as monthly payments.

Roughly speaking it's something like 90GBP a month with the 25% and 110GBP a month without it. By my math, even if she's taxed at, say, 25% on the 25%, it would take 25 years for her to have made up the lump sum. Now I know that, technically, she could re-invest the lump sum but that's still not a good deal in my book.

Am I missing something here?

lansbury

Well I guess it depends how old she is, how long do you expect her to live, and what happens to the pension if she dies. If she dies and it ceases any sort of payment, that makes the lump sum all the more attractive.

nun

There's something wrong here. If you get 90GBP with 75% of your principal, you should get 120GBP with all of it.

Also you need to factor in the fact that you will get interest on your lump sum payment. I would imaging that the two options would be essentially the same on a time scale that is close to the difference between the age of your wife and her life expectancy, so 20 to 25 years sounds about right.

TexasPenguin

Thanks guys, I just wanted a reality check and also to point out maybe to others that, just because we have to pay tax on the lump sum in the US, doesn't automatically mean it's a bad deal to take it.
Probably obvious to many, it wasn't to me until I looked at the figures...

Hotscot

Just curious...how does the US find out about your lump sum anyway?

nun

You tell them - tax fraud is not something to even consider.

FYI for UK taxes it's also your responsibility to tell HMRC about any foreign income you have that is UK taxable.

TexasPenguin

Yeah, I have already been through the "nail-biting phase" when I submitted retrospective FBARs to cover my re-discovered frozen pension in the UK (and, of course 8938, although I did catch that one in the first required year) so I'm certainly not going down that path again.
All will be declared to the IRS and treasury as required.
Just if anyone's interested, we actually got the official quotes yesterday, instead of the on-line estimator and it works out as an extra 35GBP per month against an $8,000 (minus tax) lump sum.
It's kind of sobering when you work out the calculated life expectancy (from now) that these figures imply!

Disenchanted

I'm invoking the resurrection rule on this thread. UK born, worked there from 1967 to 1985. I'm now a LTR with green card married to USC since 1985. Currently work as civil servant but also have SS contributions. The plan is to retire at 66 which is my SS retirement age and will give me 20 years as CS. I also plan to defer my UK OAP until I'm 66.

When I came here in 1985 I started fresh, never contributed any extra to pension funds there. Now come to find I have a pension with the company I worked for in 1977 to 1985, and it is payable when I'm 62 in July of 2013 Does the fact that my pension was basically frozen with no additional contributions by me since I left the UK and came here help in any way with the tax situation I now am running in to? Does it help with the "25%" lump sum (he say's while grasping for straws)?

The lump sum would be BP27,592 and would reduce the annual payment from BP7,742 to BP5,880. When I asked if I could defer payment I was told it wouldn't make much difference as the monthly payments would accumulate and be payable when I gave them details of where to send my money and UK tax would be deducted from the lump sum that had accumulated when they disburse the funds. I assume the IRS will still consider that the amount that would accumulate has in fact been disbursed to me even though it remains with the pension fund administrators.

Any advice would be greatly appreciated.
Greg.

nun

As a US resident there should be no UK tax on your pension. File a US-Individual-2002 form so that HMRC can give you a No Tax status.

As your pension is a defined benefit plan I don't think FBAR is required, but 8938 filing might be needed, depending on the value of your pension. If there's no way for you to find out the cash value of the pension you can use the annual payments you receive to calculate whether you have to file 8938.

Any UK pension amounts you receive should be included on like 16 of your 1040.

Disenchanted

nun, thanks for your reply.

Should I take the lump sum? How can I defer the disbursement until I retire at 66?

I note you will be converting your pensions to Roth's, would you put this disbursement in to a ROTH if you were in the same position? Is there no way to roll it in to an IRA so I don't pay tax until I retire?

Greg.

nun

Whether you take the lump sum is up to you and your personal circumstances. Do you need the cash now? Do the annuity calculations to see if taking it is a good deal, often the extra income is the better deal if you think you'll live to a reasonable age, but the decision is a personal one.

I have no idea about the disbursement deferral, but you should make sure no UK tax is withheld and tell your administrator that you are not-UK resident and will be claiming tax treaty exemption from taxation with HMRC.

You cannot roll a UK pension into a US tax deferred retirement account of any kind.

You should also tell the Social Security Administration about the UK pension so they can see if any US SS you would get will be WEPed.