glen2912

Hi, I will soon become eligible at age 55 to start drawing from an old company pension scheme that I had in the UK. I would like to cash out the max amount I can without having to pay UK tax and transfer it to my US bank account. Does anyone have experience doing this, what is the max amount you can transfer without having to pay any tax in the US? Thanks!

MidAtlantic

Presumably you are resident in the US? It is the withdrawal from the pension that is the issue, regardless of whether it is transferred to the US or not.

Read this thread and you will get some information, but not a definitive answer. UK USA Pensions & Finances- Seeking Advice.

Pulaski

The IRS does not specifically recognise the UK's "25% tax free lump sum", and it has been debated by many, both on BE and elsewhere, as to whether the lump sum can legitimately avoid US income tax or not. There is some wording in the IRS guidelines that some people argue can accommodate an interpretation that the 25% will not be taxed in the US, but personally I think that is a stretch.

If you want to try to avoid paying income tax to the IRS on a lump sum from a UK pension account, then you owe it to yourself to read up on the analysis and arguments on both sides before taking that step. AFAIK there is still no definitive test case on the IRS being challenged over tax on a British pension 25% lump sum, and of course there may never be as this is niche corner of tax law and I doubt most people would incur the substantial cost of trying to fight a tax assessment anyway.

All that said, you should bear in mind that the IRS takes most tax returns at face value and only audits a tiny percentage of them, skewed heavily towards people with high income. So many people may well be able "get away" with not paying tax to the IRS on a 25% lump sum UK pension payout even if the IRS would tax it and assess a penalty if they noticed it.

Glasgow Girl

Non residents pay UK tax on any UK sourced income. Assuming you have no other UK income, if you don’t need or want all of the proceeds immediately your best bet might be to take withdrawals in an amount that is below the UK tax free allowance which is £12,570 plus your 25% tax free lump sum, which would result in zero UK tax. If your plan does not allow drawdown then you could transfer to a SIPP and do it that way. AJ Bell still allows US residents to open an account, and to the best of my knowledge is the only one left that does so.

However if you are resident in the US, or a USC, the IRS will want to tax it as well, and as others have said the tax is due when you receive the funds and has nothing to do with transferring them from the UK to the US. You will get an IRS tax credit for any UK tax paid, so the end result will be that your total tax bill will be the highest amount due in either country, not the sum of the two amounts. Again, if you don’t need or want the funds immediately, a SIPP would allow you to defer both UK and IRS taxes and allow the funds to grow tax free until withdrawal. You can withdraw what you like and when you like, and can use it as tax deferred piggy bank. That might allow you to withdraw funds when it is tax advantageous in the US to do so.

If you want the funds now you will have to cough up the taxes due, no way around that unless you want to try the tax free 25% lump sum discussion with the IRS.

cautiousjon

I understood that it is pretty well established now that the dual UK/US tax treaty allows for tax free payments in one country to be allowed as tax free payments in the other country. In the USA, the UK pension 25% lump sum withdrawal being tax free, and in the UK, withdrawals from a US Roth account being tax free as well.

Edit: I feel that I've been totally wrong in my understanding of the tax liability on pension lump sum payments and have learned something new today.

https://www.fjvtax.com/blog/2019/07/...o-us-citizens/

These fine folk appear to suggest that Roth IRA distributions are tax free if you reside in the UK, but the pension lump sum is not tax free from a US perspective: https://www.goldinglawyers.com/uk-ta...k-25-lump-sum/

Pulaski

The problem/ difference between Roth withdrawals and the 25% lump sum, is that tax was paid on Roth funds going into the account, so everyone agrees that tax has already been paid on Roth withdrawals. Whereas the 25% lump sum came from the investment of pre-tax funds, and the UK allows the 25% to be tax free on the way out as well, escaping income tax entirely, which the IRS may (IMO is likely to) not agree with.

durham_lad

Fortunately I don’t have this issue to deal with as I did not choose to have a 25% lump sum with either of my UK private company pensions. With my UK pensions I create substitute 1099-Rs to report them as pension income on line 4 of the 1040.

The UK State pension (OAP) is not taxable for me or my wife (USCs living in the UK) so neither pension is reported at all on the 1040. (We use a London based dual qualified tax preparer). The same goes for SS (only taxable in the UK) but that has to be reported on line 6a of the 1040 because the IRS has been sent a copy of the SSA-1099, and line 6b is zero as it is not taxable by the IRS.

If you, or your tax preparer, decide that the 25% pension lump sum is tax free, how would you report it on the 1040? Not at all as per the OAP, or perhaps on line 4a with zero on line 4b similar to a Roth distribution, or somewhere else?

MidAtlantic

Not at all on 1040 but attach Form 8833 - Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). What you enter on 8833 is critical.

durham_lad

Gotcha.

No specific numbers, just stating what type of income is not listed on the 1040 although I suppose you could give the value in the text area of section 6.

retman

According to the Form 8833 instructions there is an exception to reporting " pension income" and the requirement is waived.

MidAtlantic

For regular pension income, yes. To put forward a treaty argument that US tax is not payable on the 25% pension withdrawal that is UK tax free (which is the point Durham Lad raised) Form 8833 is the place to do it.
Good luck to anyone who tries it and let us know the outcome!

porkedpie

This makes sense except that Roth is also capital gains tax exempt, and also that IRS does not stipulate the same for ISA gains.

durham_lad

That is because an ISA is not a retirement account, unlike a Roth IRA. You can deposit money into a regular ISA and withdraw it anytime you want, they are tax free savings accounts. A Lifetime ISA is a savings account to either help buy your first home or save until you are age 60 plus the government adds 25% of your contributions each year up to a max of £1,000/year. I'm not sure if the IRS taxes the government contributions as well as the earnings within the ISA, but they quite possibly do.

Pulaski

It's not about capital gains, it's about income tax. You either pay on the way in (Roth), or on the way out (401k, PP), and "the 25% lump sum" does neither.

And the IRS does not recognise the tax benefits of an PEP or ISA, neither of which are retirement accounts anyway, so aren't really relevant to this discussion.