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-   -   Some more questions on SS and WEP (https://britishexpats.com/forum/usa-57/some-more-questions-ss-wep-881774/)

Wombat37 Aug 13th 2016 4:09 am

Some more questions on SS and WEP
 
My apologies if this topic has been covered before - I did a forum search and could not find anything.

I've worked in the UK for a number of years and accumulated a (relatively) small pension fund. I'm 65 in 3 months and so the pension provider is asking me about how I want the pension distributed.

I now live and work in the USA and have taken US citizenship. I have 22 years of substantial earnings for SS.

The SSA calculations indicate that 50% of my UK pension amount will be deducted from my SS. My wife's SS will be based on 50% of my SS benefit. As this will be reduced by WEP, it means that our combined WEP deduction will be 75% of my UK pension. When federal and state income tax are applied I think my UK pension will be worthless or even represent a liability - a rather ironic situation considering all the payments I made to my pension over many years. I might have been better off without this pension.

I do want to pay my fair share of taxes etc. but this is stupid.

I have two strategies that I would like some feedback on:

1. Cash-in my UK pension fund before I'm 65. I may incur penalties but after a single tax hit, I would have at least some money left which would now no longer be subject to WEP because, essentially, I will no longer have a UK pension. I also know that the IRS will not give me any tax breaks on my UK pension so there's no disincentive to cashing it in early - except if the provider incurs penalties. Has anyone else done this? Any advice?

2. File and restrict my SS. I would defer my SS until I'm 70 and my wife would start taking hers at 66. I wouldn't incur any WEP deduction until I started drawing SS at the age of 70 and in the meantime I would receive my full UK pension. I'm not sure if the SSA would assess WEP on my wife's SS in the meantime. This seems to be a sound idea but perhaps the SSA has legislated against it. I was grandfathered into the File and Restrict option. I know taking a lump sum or deferring pension payments won't work because the SSA will assess the expected monthly payments as if I was taking them - but deferring SS might work. Has anyone tried this?


Again, apologies if this has already been covered.

Andy

nun Aug 13th 2016 5:12 am

Re: Some more questions on SS and WEP
 
I think the IRS will look at your pension lump sum and calculate an amount using actuarial tables and use that amount for WEP.You don't get to avoid WEP by cashing in the pension.

durham_lad Aug 13th 2016 12:11 pm

Re: Some more questions on SS and WEP
 
I agree that it seems pretty harsh. I'm in a similar situation and expect my SS to be reduced by the max WEP allowed (~$500/month) :thumbdown:

My wife will start taking her SS next year at age 62 and I plan to wait until age 70, so I guess I'm executing your plan 2. (she has no UK pension so no WEP)

I think Nun is correct about how the pension lump sum will be treated.

Wombat37 Aug 13th 2016 1:22 pm

Re: Some more questions on SS and WEP
 

Originally Posted by nun (Post 12025655)
I think the IRS will look at your pension lump sum and calculate an amount using actuarial tables and use that amount for WEP.You don't get to avoid WEP by cashing in the pension.

Thanks for the advice, however, there are a few pundits around that think differently - which is why I posted this message - to see if anyone had actually done it.

Take a look at the following from the SSA's own guidelines at
https://secure.ssa.gov/poms.nsf/lnx/0300605364


2. Withdrawals

a.Withdrawals of the employee's own contributions and interest made before the employee is eligible to receive a pension are not pensions for WEP purposes if the employee forfeits all rights to the pension. This rule applies even if the employer paid the employee contributions.


b.Withdrawals of the employee's own contributions and interest made after the employee is eligible to receive a pension are considered a lump-sum pension for WEP purposes.


c.Any separation payment, withdrawal, or refund consisting of both employer and employee contributions is a pension; for WEP purposes whether made before or after the employee is eligible to receive a pension.

There are some subtleties to it but it does seem entirely possible to avoid WEP by cashing in early. It's clause c) that worries me - everything seems to hinge of whether it was an employer contributed pension. In my case, I can't remember but I suspect it was :(

lansbury Aug 13th 2016 4:00 pm

Re: Some more questions on SS and WEP
 
During the claim process they ask about lump sum payments you will/have received. As Nun says they get taken into account.

kodokan Aug 13th 2016 5:34 pm

Re: Some more questions on SS and WEP
 

Originally Posted by lansbury (Post 12025944)
During the claim process they ask about lump sum payments you will/have received. As Nun says they get taken into account.

I wonder how far back they can realistically consider? For example, what about people who left a UK employer in their 20s and cashed out a small 'worked here less then two years' pension?

lansbury Aug 13th 2016 8:25 pm

Re: Some more questions on SS and WEP
 

Originally Posted by kodokan (Post 12026002)
I wonder how far back they can realistically consider? For example, what about people who left a UK employer in their 20s and cashed out a small 'worked here less then two years' pension?

My experience is that it is current pensions they consider.

kodokan Aug 13th 2016 9:26 pm

Re: Some more questions on SS and WEP
 

Originally Posted by lansbury (Post 12026092)
My experience is that it is current pensions they consider.

Do you know how they define 'current'? The OP, for example, is talking about cashing out a pension before applying for SS. So it wouldn't then be current - how is this any different to someone cashing one out 10/20/30 years earlier..?

Neillc37 Aug 13th 2016 9:49 pm

Re: Some more questions on SS and WEP
 

Originally Posted by Wombat37 (Post 12025853)
c.Any separation payment, withdrawal, or refund consisting of both employer and employee contributions is a pension; for WEP purposes whether made before or after the employee is eligible to receive a pension.

There are some subtleties to it but it does seem entirely possible to avoid WEP by cashing in early. It's clause c) that worries me - everything seems to hinge of whether it was an employer contributed pension. In my case, I can't remember but I suspect it was :(

If you read the tax code for 401k and IRA you end up in the land of annuities. The terminology is a little strange. They say the following:

Employees contributions - these are after tax contributions
Employers contributions - these are payroll deductions (pre-tax)

So might they be using this terminology here? Have you read it with this in mind. My UK pensions will thus have only employer contributions since they are all pre-tax.

lansbury Aug 13th 2016 11:13 pm

Re: Some more questions on SS and WEP
 
Going by the conversation I had with them when I claimed SS it seemed they were taking into account any pension lump sum payments over the previous five years, or lump sums as part of pensions we were now in receipt off, regardless of when paid, or would be claiming. Why he only asked about anything cashed out in the previous 5 years I don't know.

Mrs L hadn't taken any lump sum on any of her pensions, one of which she had been receiving for 7 years before claiming SS, so once that was established that part of the conversation didn't go any further.

nun Aug 14th 2016 1:08 pm

Re: Some more questions on SS and WEP
 

Originally Posted by Wombat37 (Post 12025853)

2. Withdrawals

a.Withdrawals of the employee's own contributions and interest made before the employee is eligible to receive a pension are not pensions for WEP purposes if the employee forfeits all rights to the pension. This rule applies even if the employer paid the employee contributions.

This addressed the situation of leaving a pension scheme before vesting. In the US state pensions often have a vesting schedule that might be as long as 10 years. If you leave before you vest ,the pension fund will pay you your contributions and interest back......its that payment that is excluded from WEP.

So if you are already eligible for your pension, and it sounds as if you are even if you cannot yet take it, then 2a does not apply.

If you are vested in your pension and you take out a lump sum it will be used to calculate a WEP amount.

mrken30 Aug 18th 2016 4:13 pm

Re: Some more questions on SS and WEP
 
Just noticed this on my SS statement
" The amount of the reduction, if any,
depends on your earnings and number of years in jobs in which you
paid Social Security taxes, and the year you are age 62 or become
disabled. For more information, please see Windfall Elimination
Provision (Publication No. 05-10045) at www.socialsecurity.gov/"

Does this mean any SS contributions made after age 62 do not affect the WEP calculation? At age 62 I will have only made 25 years of SS contributions, so I was intending on paying until age 67.

It may make little difference because the statement also says

"Your estimated benefits are based on current law. Congress has made changes to the law in the past and
can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes
collected will be enough to pay only about 79 percent of scheduled benefits. "

Pulaski Aug 18th 2016 4:18 pm

Re: Some more questions on SS and WEP
 

Originally Posted by mrken30 (Post 12029559)
Just noticed this on my SS statement
" The amount of the reduction, if any,
depends on your earnings and number of years in jobs in which you
paid Social Security taxes, and the year you are age 62 or become
disabled. For more information, please see Windfall Elimination
Provision (Publication No. 05-10045) at www.socialsecurity.gov/"

Does this mean any SS contributions made after age 62 do not affect the WEP calculation? At age 62 I will have only made 25 years of SS contributions, so I was intending on paying until age 67.

No, that is an error, which was discussed very recently on another BE thread on SS and WEP. The applicable age is your age when you actually retire. .... I am in a similar situation to you - I need to work past the age of 62 to avoid WEP.

Asg123 Aug 20th 2016 5:38 pm

Re: Some more questions on SS and WEP
 
Men born before 6 April 1951 and women born before 6 April 1953 can top up their UK state pensions by up to 25 pounds per week by paying Class 3A contributions.

http://www.theguardian.com/money/201...p-no-one-wants

But check that it's not going to reduce your US social security through WEP, if it is it's not worth it.


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