rjm_cmyk

I have looked at various threads here and on other sites but not quite got a clear steer on this so would appreciate any help.

I took a lump sum payment/drawdown from a small UK AVC fund I have using the drawdown option. I didn't pay any UK tax on it (25% rule).

I know I will need to declare it here but was wondering what the simplest way to report it. I understand from comments here that the IRS treat a lump sum payment as "other income" rather than a pension payment and the form that entails (1099R?).

Can I offset that in any way e.g by declaring the cost basis (if I can out what it is) or is that only for defined contribution pension payments ?

Any help will be appreciated.

nun

You would certainly report the taxable basis if you have already paid tax on the contributions or gains. Why do you think you have a tax free basis?
You can report the payment on line 16 or line 21.

rjm_cmyk

I suspect I am out of luck. The contributions went in before tax so I'm expecting to pay tax coming but. Was just wondering if the IRS treat lump sump payments which are tax exempt in the UK any differently to any other income that is taxable at payment. I know that sadly the US don't acknowledge the tax free status of portions of UK pensions.

nun

If you can turn those payments into something that can be defined as income then the 25% UK tax free sum would also be US tax free. To do that you have to take "periodic payments", so if you do drawdown using a lifetime annuity calculation like 72t then you can argue that as 25% of it is US tax free as it's also UK tax free.

Shezi59

I took my UK Teacher Pension last year, which included a tax free lump sum. I reported it in my US tax filing and had to provide evidence that it was tax free in the UK. As long as I could do this, it was treated in the same way by the IRS. This is where understanding the Tax Treaty is essential. Do you use a CPA?

Steve_I

I'm not sure how you got away with that one! My wife took a pension from the NHS a couple of years back and we paid a ton of tax on the lump sum. We took advice from HR Block (I know.... It was HR Block), but the guy preparing the tax return took advice from their "University" and they provided the paperwork from the IRS that said it was taxable. I have a pension coming up this year from BT in the UK. I'm waiting for an answer from them to see if I can forgo the lump sum in return for a bigger pension.

nun

Well you might have benefited from a mistake by the IRS then. UK tax free pension income is US tax fee, but a UK tax free lump sum payment is taxable in the US. If the 25% tax free amount was used to provide a larger lifetime pension income that would be 25% tax free in the UK then the IRS and you got it right.

Brizzleboy

Hello, Just signed up as this thread is interesting, I am investigating transferring my defined company pension and AVI into a Qrop, what's the feeling about this? getting the 25 or 30% tax free lump sum is a big thing for me so perhaps this is a way of not paying tax on it, Thanks.

Cook_County

A QROP for a US person would be crazy. Period.

nun

Agreed.....QROPS are expensive.....QROPS as a US tax payer are insane.

Brizzleboy

Thanks got that loud and clear, so whats the best way to consolidate several deferred pensions and get them money over here as cheaply as possible?

nun

You should consolidate within the UK......the the only way to get the money out is the usual UK retirement income options.

Otto The Squid

I think that is going to be the right answer in nearly all cases. UK to UK is deemed an eligible rollover, moving to a ROPS may not be.

Brizzleboy

Yep I get that, my only fear is that the fund value might not be there 3 years when I need it, my value has fallen already and frankly don't trust the pension company, I have had 3 valuations in a year all at lower values.

kodokan

The pension is just a wrapper. There is likely a choice of investments within it that you can pick from, depending on your preferences and risk profile: shares, corporate bonds, gilts, managed or index funds, UK only funds, Emerging Markets, Target Date funds, etc. That's what will drive your return; that, and the fees for the investments you choose.

If you're only three years from drawing on it, the norm is to have it very conservatively invested by now.