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Pension Lump Sum and Tax

Pension Lump Sum and Tax

Old Jan 20th 2011, 5:24 pm
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Default Pension Lump Sum and Tax

What have been peoples experience on USA taxes and their lump sum at retirement from a UK pension?
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Old Jan 20th 2011, 5:50 pm
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Default Re: Pension Lump Sum and Tax

Originally Posted by MHolkham View Post
What have been peoples experience on USA taxes and their lump sum at retirement from a UK pension?
Not sure, but I do know the US doesn't view certain tax-free investments the same as the UK - for example, ISAs, endowment policies, etc. (when a UK endowment matures, it is not taxable in the UK, but it is taxable in the US). |t least, this is my recollection from past queries about these issues.

I would look into this very carefully with a UK/US tax expert before making any moves, otherwise you could end up paying tax that you shouldn't. Depending on your plans, it might be worth holding off on receiving your pension until you know for sure.

As with all other important major tax and financial issues, regardless of what you read here (including my post), it's worth paying for professional advice.
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Old Jan 20th 2011, 6:31 pm
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Default Re: Pension Lump Sum and Tax

Originally Posted by MHolkham View Post
What have been peoples experience on USA taxes and their lump sum at retirement from a UK pension?
All the professional advice I have every had or seen says it is taxable if it is paid once you are a LPR or citizen.

While there may be a little room to argue that, our CPA said very firmly it wouldn't be accepted and it would get taxed. That was the lump sum on my wife's UK university employees pension scheme.

If you take the lump sum and couldn't avoid the tax, depending on the size of the lump sum it could push you up into a higher tax bracket for that year. That way you end up loosing more of it than if you took the full monthly amount. My wife on all the advice we got declined the lump sum and took a full pension.

But as dunroving said this is one of those areas where the fee to get professional advice is money well spent. If it is a government service pension you need to get professional advice as some aspects of them are treated differently to other pensions dependent on the country you live in and the citizenship's you might have.
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Old Jan 20th 2011, 9:02 pm
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Default Re: Pension Lump Sum and Tax

Originally Posted by lansbury View Post
All the professional advice I have every had or seen says it is taxable if it is paid once you are a LPR or citizen.

While there may be a little room to argue that, our CPA said very firmly it wouldn't be accepted and it would get taxed. That was the lump sum on my wife's UK university employees pension scheme.

If you take the lump sum and couldn't avoid the tax, depending on the size of the lump sum it could push you up into a higher tax bracket for that year. That way you end up loosing more of it than if you took the full monthly amount. My wife on all the advice we got declined the lump sum and took a full pension.

But as dunroving said this is one of those areas where the fee to get professional advice is money well spent. If it is a government service pension you need to get professional advice as some aspects of them are treated differently to other pensions dependent on the country you live in and the citizenship's you might have.
I'm presuming this is the same regardless of where you are residing (e.g., if you become a USC but move back to the UK to retire?)

If so, this should be added to the list of pros/cons of taking US citizenship - I don't often see it listed when the question is asked. People tend to mention that you have to submit a US tax return every year, but that you are covered by the dual taxation treaty - but I don't think I have seen anyone highlight this quite considerable tax disadvantage of taking US citizenship.
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Old Jan 20th 2011, 9:27 pm
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Default Re: Pension Lump Sum and Tax

Originally Posted by dunroving View Post
I'm presuming this is the same regardless of where you are residing (e.g., if you become a USC but move back to the UK to retire?)
I have absolutely no idea if it remains the same if you are in the UK. It's a very good question that I don't believe has been asked on here, it is always phrased as a Brit moving to the US. Anothe reason why on this subject professional advice is required.
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Old Jan 21st 2011, 5:15 pm
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Default Re: Pension Lump Sum and Tax

Originally Posted by MHolkham View Post
What have been peoples experience on USA taxes and their lump sum at retirement from a UK pension?
If you have the chance to take your lump sum before you become a USC for tax purposes then you should. As other posters have alluded to, it really depends on which tax adviser you consult. There is a case for it to be taxed and a case for it not to be taxed. If in doubt I would suggest you take it whilst UK tax resident.

For any other reader who might be thinking about transferring their UK plan to a QROPS (offshore pension) and then taking the lump sum, then it will be taxable in the US.


Quote:
Originally Posted by dunroving View Post
I'm presuming this is the same regardless of where you are residing (e.g., if you become a USC but move back to the UK to retire?)


Again, a very grey area in which I have ongoing dialogue with various tax advisers. Though, the tax treaty protocol was changed to prevent USC's moving to the UK and taking 25% of their IRA tax free. I would suggest that that still applies. However, you can transfer an IRA to a UK plan (though finding US custodians and UK firms that are aware of that is difficult) if you were moving back to the UK but of course the transfer value would not attract UK tax relief (now that would be fanciful!)
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