kodokan

Hi all

Our move is coming along - we have our visa interview next week in Bern (we're British, but currently working in Switzerland), and are working towards a move to Phoenix in mid-October. We'll close out all our Swiss financials, but still have bank accounts and pensions in the UK.

I've been looking into tax reporting, to see what things should be done BEFORE we move to make our lives simpler once in the US. I understand all the tax, FBAR, etc implications of normal bank accounts, but I'm stuck on pensions. I've had a good search here, but the threads all seem to concern drawing a UK pension or trying to slay the mythical QROPS beast.

Between us, we have both personal pension and company pension funds in the UK, which are just going to sit there until we retire. The company ones, from previous employment, are defined contribution ones (ie, money purchase not final salary), which I think means they're included as there is actual money in a pot with our name on it. At present, we get annual statements based on value at April 5th, which is posted to us some time each summer.

Could anyone kindly explain what we'll need to report as regards the pension funds? Obviously we're not contributing to them, and can't move, touch, do anything with them until retirement (25+ years away). Are there ways to have the money invested to make the reporting easier - stay away from particular sorts of funds, etc? And can UK pension companies give the information in the format we'll need, as the US has an entirely different tax year?

Fretting a little about this, so I'd be grateful for any 'oh, it's a bit of a nuisance but do-able, we do it this way' type stories!

Thanks a lot.

nun

This might help a bit.

http://www.expattaxandlaw.com/Foreign_Pensions_FAQ.html

I believe that withdrawals from your company or personal pension plans will be only taxable in the US. However, I'm not sure about which need to be included on FBAR and whether PFIC rules would be applicable.

kodokan

Thank you, nun, useful link. The IRS are seriously unhelpful on this, aren't they! It seems very 'rock' and 'hard place':

- got these pensions from years before we knew we were moving to the US
- can't liquidate them (like we can our Swiss ones in a totally tax advantageous way )
- can't move them to the US
- have to report them to the US authorities. Probably. Maybe. But the IRS can't absolutely confirm that yes or no, or what to report, yet if we get it wrong the consequences are horrific.

There's a serious need for a global 401(k). I wouldn't even mind taking a reasonable tax hit on the pensions - we're not talking huge sums - to make the problem go away.

Anyone else got zombie UK pensions they've worked out to report?

Thanks!

nun

I think you need to employ a dual qualified tax person as you are in a situation that is complex and even the IRS doesn't exactly know how to handle.

On the bright side the company pension is probably ok as employer- sponsored plans are definitely covered by the treaty. So you can invest in whatever is available and it will be tax free until you take income out at which point you will need to get the IRS to communicate with HMRC so that UK tax will not be withheld.

However SIPPs – (“Simplified Individual Pension Plan”) are tricky. I've read that these accounts might be considered to be foreign trusts and you would need to report the earnings and capital gains each year on your US taxes. There might not be any tax due to the US, but it's a paperwork nightmare. Also PFIC rules might apply to them.

The other view is that the are in fact qualified retirement vehicles and as such exempt from tax. I don't know if the IRS has ruled on this.

Another tax trap is the ISA (“Individual Savings Account”). These are considered a foreign trust by the IRS and you do need to report your income and capital gains in these accounts each year on your US tax return (even though it is tax-free in the UK). You will need to pay tax on the income and gains from these accounts.

SIPP’s and ISA’s will also need to be reported on your FBAR (“Foreign Bank Account Form”) each year.

kodokan

Thanks nun (are you the same nun as on UK-Yankee, BTW? I was on there earlier, hunting. Or maybe I just read some of your posts here - it's beginning a blur a little now...).

As it's a corporate move, we actually have tax assistance provided from a Big Name firm, but they're not being terribly useful on this issue. It's complicated because we're moving from Switzerland - we have Swiss experts, and US experts, but no-one seems to be able to answer my questions about our UK accounts. (But if they do come back with some stunning response, I shall tell everyone here all about it!)

So this is what we have in the UK:

- two defined contribution (money purchase) company schemes from previous employment; nothing has been contributed to these since 2008 and no contributions will be made in the future

- two personal pensions (normal 'stakeholder' ones, not SIPPs, where the only possible investments are in a range of half a dozen or so in-house funds); nothing has been contributed to these for at least a decade, nothing in the future, etc

So, zombie funds from our previous UK existence, which will just sit there until we retire in about 25 years' time. We have no other UK investments, no ISAs, no individual shares, just a couple of bank accounts (but I know what to do with those as regards reporting for tax and general US nosiness).

I honestly don't mind if these turn out to be taxable in some way - we're not talking large amounts. I just can't get my head around what the IRS want us to report, on what forms, using what information, and how I'm going to begin to explain to UK pension providers like Abbey Life and Norwich Union/Aviva exactly what I want them to give me!

*sob - takes big swig of wine*

(The Swiss pension rules are so marvellous by comparison - as we're leaving the EU, we can leave it here in a pension account until retirement, or pay a tiny amount of tax and then just have the whole cash sum delivered to a bank account of our choice. I heart Swiss finances.)

nun

So are you going to cash out.....doing that I assume you'll loose a lot of tax free growth but avoid having to worry about how the US deals with Swiss pensions.

I think you are set wrt the company pensions as they considered qualified schemes under the tax treaty and you can keep them with no tax liability until you start making withdrawals.

The personal pensions are the issue and here is an explanation by the principal at British American Tax. Maybe you can get your company to pay for some of her time in this particular situation. But my take form reading the link and that you won't be making any more contributions would be to go the route suggested in paragraph 4a)

http://www.taxalmanac.org/index.php/...Pension_/_SIPP

kodokan

Thank you for the link, nun, most helpful thing I've read on the issue so far!

If we don't have to report them but they just become a tax issue upon withdrawal, that would be fab. I'll see what my company-provided tax person comes back with now then - your link will be very helpful for moving the discussion forward.

(The Swiss pension is a marvel from an expat point of view - company pension scheme, with contributions tax-free from the employee along with generous employer top-up (ie, we saved about 20% income tax on the way in, and the employer conts aren't classed as taxable income for us). Because we're moving outside of the EU (different rules would otherwise apply), we can withdraw the whole lot as cash, subject to a small withholding tax of about 5%. And then we can put the money into something in the US to get the non-foreign, far simpler tax-free growth.

It's worth the 5% hit to get the simplicity and flexibility of not having the money tied into official retirement dates. If anyone here gets the chance to work in Switzerland, max out the company pension scheme with voluntary top-ups - we'd have done this 3 years ago if we'd known we were leaving, whereas now it would, quite reasonably, count as tax evasion.)

nun

Make sure you cash out the Swiss pension before you become a US resident.
If you meet the income requirements you can put up to $5k of after tax money into a US ROTH account in which the growth and the withdrawal are both tax free. You could also buy a tax deferred annuity and you'll only be taxed on the growth when you take income out. Be careful with these as they can have high fees and like most US retirement products there are restrictions on how and when you can take income.

kodokan

Already there, thanks. We'll almost certainly choose to be non-resident for 2011 as we don't meet the number of days rule, which is handy for the Swiss pension cash out, last salary payment, etc.

And then I'll look into what to do with money once we're there - hubby's job will be earning it, mine will be increasing it afterwards!

nun

The US is good for investors as capital gains tax is pretty low and there are lots of low cost brokerage and mutual fund companies. You'll probably end up with a defined contribution retirement plan (401k) where you have a choice of mutual funds. Here is an excellent primer on US investing and finances

http://www.bogleheads.org/wiki/Main_Page

If you are into mutual fund investing rather than individual stocks and shares take a look at Vanguard.com and visit the boglehead forum at

http://www.bogleheads.org/forum/index.php

kodokan

Thank again nun, will have a good read of those links. I'm a big follower of the UK Motley Fool too, so plan to have a good rummage around the US Fool site once we're settled.

I'm making some progress on my pension. It's with Aviva, who have an excellent website for managing it online - I can get statements of the value on any given date which will help with the mis-aligned tax years, and shuffle the money into different funds and asset classes.

Do you happen to know, with personal/stakeholder pensions, is the reporting headache due to the pension wrapper itself, or the investment choices within it? Would it simplify reporting if I just transferred the balance into the pension's cash fund? (Obviously the return would suck, but we're only talking a few thou here anyway. I can just consider it the non-risky part of my overall retirement planning.)

Or is it a whole can of reporting worms regardless, simply because that 'cash' is held in a pension?

If I can somehow narrow the reporting down to FBAR without doing PFIC and all those other 'it's a foreign trust' forms, that'd be great!

Appreciate your taking the time to help me like you've been doing. Once I get a steer from our tax specialists, I'll come back and share.

nun

The issue is that the status of personal pensions is up for debate. If it's a foreign trust you have to deal with PFIC, trust forms etc, tax on gains each year. So if you move the money into a cash account you would not need the PFIC forms. If it can be treated as a qualified retirement account you can claim treaty exemption on tax of any gains. For your company pension it's sure that it's covered by the tax treaty so that pension wrapper protects you. If the company controls the pension then strictly speaking you don't have to do FBAR either, but I'd put all your pensions on the FBAR just in case.

This is an area where I really think you need the backing of a professional to argue your approach. But my preference would be to claim treaty exemption on all your pensions (and keep them invested however you like), and also declare them on the FBAR just in case. I'd take that starting point to a company like British American Tax, get some advice and send the bill to your company.

kodokan

Thanks again nun, I think I've got it as straight in my head as I can for the time being. I'll wait now and see what the 'experts' come back with - at least I now understand the questions that need to be asked. We'll also look into other ways of simplifying it, like whether it's possible to move hubby's old personal pension into his old company scheme; they may allow transfers in.

(I'm a bit calmer about it today, because we've just got approval for hubby's company to pay for the preparation of our 2012 taxes too in addition to 2011, as we won't be resident in 2011 so wouldn't be taken through the entire process in order to understand it going forward. They've realised that we're in a hugely complicated situation - we have all our accounts from our life in the UK from until we moved from there 3 years ago; we're no way going to wash out our Swiss tax liability and get the rebate for this year for months; etc.

So, ultimately, it's someone else's headache until the end of 2012. Very reasonable of them.)

nun

That's a good deal and must be a big relief. I'd love to know what the experts say. Please post their conclusions.

kodokan

Shall do. Right - off to go and leverage our UK HSBC connection to open US Premier accounts so we can have bank accounts and credit cards set up before we arrive. Never-ending, this emigration lark, isn't it!