sjbarker1

Sorry to repeat what is probably said in 25% lump sum thread but from the this document:
'www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19876a'

It says this:The provision preserves the exemption from income tax of a lump sum relevant benefit where it is paid by a UK approved pension scheme to a beneficial owner who is a US resident. However, Article 1(4) will apply in respect of US citizens as the provisions of Article 17(2) are not amongst those listed at Article 1(5). So the US are able to tax lump sums received by US citizens from UK schemes.

As I am US resident not a US citizen, it suggests my pension 25% lump sum from my UK Pension would not be taxed?

nun

As you are a US resident you will be taxed just like a US citizen. Be careful reading HMRC advice as they are not the IRS.

If a US citizen or US resident receives a lump sum distribution from a UK pension plan then that is taxable by the US as it is covered by Article 17.2 as that does not appear in the saving clause. The point of contention here is what constitutes a "lump sum distribution" as that term is used differently by the IRS and HMRC. If you can argue that the UK 25% tax free amount is covered by Article 17.1 and so subject to the saving clause then it will be US tax free to US citizens and US residents. If you have a DB plan and can arrange your regular lifetime payments so that they are 25% UK tax free, then I think you will have the best case possible to claim 25% US tax exemption under Article 17.1.

sjbarker1

Yes unfortunately you are correct. I found a blog that included specific language from the IRS, which basically says:The IRS has specifically said what is clearly in the Treaty:

Article 1(5) of the Treaty provides a number of exceptions to the saving clause, but there is no exception for Article 17(2). Therefore, the saving clause overrides Article 17(2) and allows the United States to tax a lump-sum payment received by a U.S. resident from a U.K. pension plan.

Oh well!

sjbarker1

So thanks friends for indulging me as I move to the next category. UK State Pension (aka social security) vs US Social Security payments. So in the UK I qualify for most of the UK State Pension, since I have 30 years of credits. However, in the US, even though I have been making payments these will add up to 15 years and since then I have UK based pensions, I run into the 'Windfall Elimination Prevision', which basically means I could lose up to 40% of my SS benefits. However, I read there is an agreement between US and UK, such that SS contributions can be 'summed together', such that my UK SS credits could be applied to the US SS credits, so then I could add 30(UK)+15(US), to give a total of 45 years? This would then take me out of the WEP threshold and also significantly increase my US SS payments? Conversely I assume I would not then get the UK State Pension?

tht

they are added together if you don’t qualify for either with only that countries credits. If you qualify for both they won’t be combined and WEP may apply.

nun

For StatePension/SS the top up payments are only used so that you can qualify for a benefit, not in it's calculation. As you have more than 10 years of SS payments it's of no use to you. FYI there are some moves in Congress to get rid of WEP. How you are taxed is going to depend on you tax residency status and if you are a US tax resident and not resident in the UK then both UK State pension and US SS will only be taxable in the US.

Glasgow Girl

In any case your final salary scheme is also subject to WEP, so even if you could avoid WEP on your UK state pension (which you can only do if your contributions were voluntary) they will get you on your occupational pension. Any occupational pension based solely on voluntary contributions with no match from any other source are also WEP free. In general those would be the old FSAVC schemes. The only silver lining is that WEP maxes out at $480 per month (for 2020, it is adjusted each year for inflation). Since it is calculated at 50% of your income, any pension income (occupational plus state pension) above $960 per month will be WEP free.

nun

I just want to clarify that a UK employee pension funded with income that was not subject to FICA tax cannot be reduced in anyway by the IRS. It will be used to calculate the level of WEP reduction to your US SS paymemts.

durham_lad

That is why I don’t worry about OAP voluntary contributions not affecting my SS. My UK private pensions will WEP me to the max. Although even that should not be much as I will have 28 years of SS contributions.