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IRS & "Tax-Free" UK pension lump sums

IRS & "Tax-Free" UK pension lump sums

Old Feb 17th 2013, 4:53 pm
  #46  
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Default Re: IRS & "Tax-Free" UK pension lump sums

Thanks nun,

Because I will be working until I'm 66 (2017) I'd like to defer all my pensions until then. I'm trying to plan for the eventuality of returning to the UK so ROTH's seem to be where I should put this pension disbursement, as well as converting my IRA that I have here.

I will already be getting the maximum WEP reduction of my SS pension when I draw it due to my Civil Service Pension.
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Old Feb 17th 2013, 5:06 pm
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by Disenchanted
Because I will be working until I'm 66 (2017) I'd like to defer all my pensions until then. I'm trying to plan for the eventuality of returning to the UK so ROTH's seem to be where I should put this pension disbursement, as well as converting my IRA that I have here.
You should tax some personal tax advice on this, but in general with foreign retirement accounts you should keep things as simple as possible. When you take the pension, pay the taxes on it, and if you want to save the after tax dollars, you can still do that.

If you're planning to return to the U.K. would your strategy be to abandon your green card when you leave? Or become a U.S. citizen before you leave.

I will already be getting the maximum WEP reduction of my SS pension when I draw it due to my Civil Service Pension.
If you have been paying Social Security for 30 years (with earnings above the minimum threshold) there should normally be no Windfall Elimination Provision. This assumes that all your employment in the U.S. has been covered by Social Security, if that's not the case then you will have WEP.
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Old Feb 17th 2013, 6:23 pm
  #48  
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by Disenchanted
Thanks nun,

Because I will be working until I'm 66 (2017) I'd like to defer all my pensions until then.
Whether you can defer the pension will depend on how it's set up and the administrator

I'm trying to plan for the eventuality of returning to the UK so ROTH's seem to be where I should put this pension disbursement, as well as converting my IRA that I have here.
If you have earned income and meet the ROTH thresholds, this year you can put up to $6000 into a ROTH. You can rollover 401k, IRA etc into a ROTH, but you must understand the US tax implications of the extra taxable income. You could always just invest in regular mutual funds if you have spare cash.

I will already be getting the maximum WEP reduction of my SS pension when I draw it due to my Civil Service Pension.
If you started SS contributions in 1985 you will have 30 years of contributions in 2015 and you won't get WEPed no matter how much non-SS wage pensions you get. You also have 18 years of UK SS so I would suggest that you pay voluntary Class 2 NI to max out your UK state pension. You can pay 6 years in arrears.
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Old Feb 17th 2013, 9:05 pm
  #49  
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Default Re: IRS & "Tax-Free" UK pension lump sums

nun
Worked in private sector from 1985 to 1997, with some self employment before/after 1997, worked in civil service since 1997 so do not have 30 years of SS payment, based on the chart I will incur the max WEP which is currently $380'ish.

At 66 I will end up with a little over $1k/mo SS before WEP and around $3500/m civil service pension, add to that a probably tiny UK OAP from 1967~1985 NHI contributions and about $1/m from my UK pension. So $6k/m before WEP & taxes probably means I won't be able to afford to retire

JAJ
I have a house and an IRA, the IRA is currently invested in property and I hope to see those funds returned to my IRA before I retire. I'm trying to plan my retirement with an exit strategy to the UK if I feel so inclined. I think I need to take stock of my net worth to see if it would be better to apply for citizenship prior to returning to the UK due to lower limits allowed by resident alien status. USC or Resident Alien I would probably relinquish because of the tax filing requirements of the IRS, it is too onerous and I don't need the headache.

I think that before any country signs a tax treaty with the IRS/USA they should insist they get on the same page as the rest of the world rather than the rest of the world having to get on the same page as the IRS. I truly hope the rest of the world penalizes or rejects US investors in international investments based on the regulations being imposed and that it ultimately affects the USA's economy to such an extent the whole FACTA/FBAR silliness is dismantled.
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Old Feb 17th 2013, 9:17 pm
  #50  
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by Disenchanted
nun
Worked in private sector from 1985 to 1997, with some self employment before/after 1997, worked in civil service since 1997 so do not have 30 years of SS payment, based on the chart I will incur the max WEP which is currently $380'ish.

At 66 I will end up with a little over $1k/mo SS before WEP and around $3500/m civil service pension, add to that a probably tiny UK OAP from 1967~1985 NHI contributions and about $1/m from my UK pension. So $6k/m before WEP & taxes probably means I won't be able to afford to retire
Sorry I thought you had worked in the US since 1985....what SS didi you pay into from 1985 to 1997?

You should look in to paying Class 2 voluntary NICs if you want to increase your UK state pension
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Old Feb 17th 2013, 9:42 pm
  #51  
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Default Re: IRS & "Tax-Free" UK pension lump sums

nun,

I know I can defer my UK OAP and get an extra 1% for every 5 weeks but tell me more about Class 2 voluntary NIC's. Could I take my pension due to start in August and buy the NIC's? Is there an annual limit? Would it provide a better return than a ROTH? Could I use my tax free lump sum? If so would it still be taxable here?

edit:
PS: I'm waiting for my HMRC pension statement that I requested about a week ago.

Last edited by Disenchanted; Feb 17th 2013 at 9:44 pm.
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Old Feb 17th 2013, 10:11 pm
  #52  
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by Disenchanted
nun,

I know I can defer my UK OAP and get an extra 1% for every 5 weeks but tell me more about Class 2 voluntary NIC's. Could I take my pension due to start in August and buy the NIC's? Is there an annual limit? Would it provide a better return than a ROTH? Could I use my tax free lump sum? If so would it still be taxable here?

edit:
PS: I'm waiting for my HMRC pension statement that I requested about a week ago.
If you were born in the UK you can probably pay voluntary NICs while you are abroad. You just send HMRC a check, it's irrelevant where the money comes from. If you are working abroad you can pay Class 2 which are 2.50 GBP a week (amazing deal), or if you are unemployed you can pay Class 3.

Whether they provide a better return than a ROTH is like asking "how long is a pice of string". Pay the NICs and do the ROTH! That's what I do.

Also no matter what you do with your lump sum it is US taxable.

http://www.hmrc.gov.uk/pdfs/nico/ni38.pdf
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Old Feb 17th 2013, 10:19 pm
  #53  
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by Disenchanted
JAJ
I have a house and an IRA, the IRA is currently invested in property and I hope to see those funds returned to my IRA before I retire. I'm trying to plan my retirement with an exit strategy to the UK if I feel so inclined. I think I need to take stock of my net worth to see if it would be better to apply for citizenship prior to returning to the UK due to lower limits allowed by resident alien status. USC or Resident Alien I would probably relinquish because of the tax filing requirements of the IRS, it is too onerous and I don't need the headache.
You probably should start a new thread to discuss this topic (whether you should become a USC or not, tax consequences of expatriation, etc.). Hard to see why you would become a USC and then renounce, however as a long term green card holder the expatriation provisions will apply equally to you if you're a "covered expatriate".

Also, if you intend to bring your wife to the U.K., note the difficulties now to get a spouse visa and the fact she would be stuck on temporary status for 5 years.
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Old Feb 17th 2013, 10:30 pm
  #54  
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by Disenchanted
nun

I have a house and an IRA, the IRA is currently invested in property and I hope to see those funds returned to my IRA before I retire.
What does this mean? Do you have "alternative investments" in the IRA? You just can't return money to an IRA if you've taken it out.
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Old Feb 18th 2013, 12:12 am
  #55  
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Default Re: IRS & "Tax-Free" UK pension lump sums

Probably starting to get off topic.

JAJ,
I am still pondering the whole USC/ResA thing along with going back to the UK. With USC spouse it looks to be even more complicated because of IRS rules.

nun,
My IRA funds are used to invest in a company that invests in land. Basically I believe we are shareholders/partners. When the land is sold the cash will go back to the company managing the IRA, the investment co reports current value to the IRA manager and they in turn will disburse to me at maturity.

So I guess the tax free lump sum is a waste of time even discussing if you are a UK expat living in the USA. There's a treaty but the IRS is still gonna tax you on everything and that's that. I hope this FACTA/FBAR and worthless Tax Treaty cause some serious financial obstacles or costs for a lot of wealthy US international investors - then maybe things will change for the better.
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Old Feb 18th 2013, 12:39 am
  #56  
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by Disenchanted
Probably starting to get off topic.

JAJ,
I am still pondering the whole USC/ResA thing along with going back to the UK. With USC spouse it looks to be even more complicated because of IRS rules.

Correct. Even if you abandon your green card, your wife (as a U.S. citizen will still need to file taxes).

So I guess the tax free lump sum is a waste of time even discussing if you are a UK expat living in the USA.
Not necessarily a waste of time, as long as you factor taxes into the calculation. Sometimes it is still better to take the lump sum and pay the tax, sometimes not.

There's a treaty but the IRS is still gonna tax you on everything and that's that. I hope this FACTA/FBAR and worthless Tax Treaty cause some serious financial obstacles or costs for a lot of wealthy US international investors - then maybe things will change for the better.
Tax treaties are designed to prevent double taxation. However they do not prevent a situation if you receive something that is taxable in the United States but not in the United Kingdom. This is the principle among most tax treaties, including other countries as well as the United States. This would apply regardless of FBAR/FATCA.
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Old Feb 19th 2013, 1:41 am
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by JAJ
Not necessarily a waste of time, as long as you factor taxes into the calculation. Sometimes it is still better to take the lump sum and pay the tax, sometimes not.
Which is what brought me to this thread to begin with. Still searching for an answer though.



Originally Posted by JAJ
Tax treaties are designed to prevent double taxation. However they do not prevent a situation if you receive something that is taxable in the United States but not in the United Kingdom. This is the principle among most tax treaties, including other countries as well as the United States. This would apply regardless of FBAR/FATCA.
It's not the tax treaty so much as the way the IRS is a US citizen based tax regime rather than location based like the rest of the world and the tax treaty is skewed to accommodate that fact. What is most irksome is that a pension I established in the UK before I ever came here is now subject to tax on a lump sum distribution that my country of origin allows to be tax free. Taxes on a pension should be due to the country where the pension was established when the funds used to establish and fund it came from that same country.

Thanks for all your input, and if I find out anything that can help anyone in the same situation I'll be sure to post it here.
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Old Feb 19th 2013, 3:01 am
  #58  
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by Disenchanted
Which is what brought me to this thread to begin with. Still searching for an answer though.
A good CPA/financial planner could work through the calculations with you. Since it's all taxable, the comparison is mainly based on how much lump sum you get versus how much pension you lose. But it's always case-specific. For example, receipt of a lump sum could push you into a higher tax bracket. To forego the lump sum and take the standard pension involves taking a view on factors like future life expectancy, credit risk on the pension plan, and the future direction of the exchange rate + your future plans in life. Also depends on whether you plan to become a U.S. citizen or abandon your green card.


It's not the tax treaty so much as the way the IRS is a US citizen based tax regime rather than location based like the rest of the world and the tax treaty is skewed to accommodate that fact. What is most irksome is that a pension I established in the UK before I ever came here is now subject to tax on a lump sum distribution that my country of origin allows to be tax free. Taxes on a pension should be due to the country where the pension was established when the funds used to establish and fund it came from that same country.
That's the deal when you move countries.

If you were in Canada, for example, you would also pay (Canadian) tax on the lump sum. No difference, except you could abandon your Canadian tax residence by emigrating from the country, without needing to lose Canadian citizenship. And if you did this before the lump sum was paid, you might be able to avoid Canadian tax. That's generally not possible for Americans, unless you are prepared to renounce U.S. citizenship or your green card.

Many people would never trade U.S. citizenship for a tax concession, but everyone is different.
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Old Feb 19th 2013, 4:47 am
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Default Re: IRS & "Tax-Free" UK pension lump sums

Wow!!!
An unexpected blast from my past.......
So pardon my diversion from the thread diversion but...
Having just logged on for the 1st time in awhile - I took a double take at the sight of this thread on the list of todays posts. I'm its OP - but - what makes it particularly surreal is that the post from me which begins the thread - just happens to be the 1st message I ever sent in this forum (back in Oct 2011).
Re-reading it now serves to remind me of how and why I originally came to discover BE.com
Until I finally did (on the very day I posted that 1st message) - I'd been blindly floundering, for several months, in a web of ever increasing financial confusion. Here, at last, were some generous, knowledgeable strangers - individuals who were willing to take the time to patiently deal with my queries - and, by so doing, finally clear up that confusion.
And reading the thread also serves to remind that my gratitude for the advice I received is the fundamental reason why I, in turn, will happily try to assist others whenever I feel I may have some relevant experience or insight they might find helpful. (aka: Karma right?)
ok....'nuff of these soppy, sober, serious sentiments......
and back to the fun and joy of "lump (it or leave it) sums", FBARS and double-trouble taxation
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Old Feb 19th 2013, 4:53 am
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Default Re: IRS & "Tax-Free" UK pension lump sums

Originally Posted by Disenchanted
What is most irksome is that a pension I established in the UK before I ever came here is now subject to tax on a lump sum distribution that my country of origin allows to be tax free. Taxes on a pension should be due to the country where the pension was established when the funds used to establish and fund it came from that same country.
If you take the extra income option you could increase your 401k contributions (if you don't already max them out) and/or contribute to an IRA. That would reduce your taxable income to offset the extra taxable pension income you'll be getting.
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