Knight

I've been doing some searches on the forum for pension and tax rules, and I came across this post which contains some excellent information, but was from 2003 so I don't know how relevant it is today.

I am trying to find out if, when it comes to doing US Tax Returns, do I have to declare the money held in the UK Company Pension as foreign earned income?

I originally made an enquiry with the company (Paymaster) who administers the pension about either cashing out the plan (it's only been filling up for 6 years and has just over 5k in it) or moving it into a US Company Pension when I get set up with a job.

I got a reply from them saying "When you leave EDS (company I work for) your pension benefits remain in the scheme until you retire and these benefits become payable. Alternatively the benefits can be transferred into an overseas pension plan."

I had resigned myself to not being able to transfer it between the UK and the US, and was quite happy to leave it in the UK given the strength of the pound. If I do leave it, how does it effect me US Tax wise?

Any help or pointers appreciated.

dunroving

First off, I'd suggest you definitely talk to a knowledgeable CPA. However, my understanding and experiece as a non-tax-expert is:

It's not easy to transfer a UK pension into a US pension csheme - search and you'll find regular posts on this. There are ways, but they are complicated and costly.

If on retirement you are a US resident for tax purposes, you are supposed to delcare all worldwide income.

There have also been discussions on here about what to do about declaring UK income that comes from sources that are tax-free in the UK (e.g., endowments that mature, ISAs, etc.). The consensus seemed to be that the US would tax you on it, but several people made the point that you could probably get away with not declaring it (by leaving it in the UK and gradually trickling it over, or saying it was "savings" you were transferring).

The same works the other way. I wouldn't invest in a Roth IRA pension in the US (you pay into it with after-tax dollars and when you withdraw from it, it is tax-free IN THE US). My concern was that another country might not respect the tax laws of the country you creatd the tax-free investment vehicle.

Patrick Hasler

I have a company pension from the UK. I am just leaving it to mature (which it seems to me doing well) and claim my lump sum when I am 65.
I have company pension here also and have not linked them.

Knight

That's basically what I am going to go for (although it's only 5k in there, it's another 40 years + before I cash it in, so it may grow a little).

Did you have to do anything special before you left? Like notify the administration company of your US address? Inform IRS about an overseas scheme? Or is it as simple as keep it there and do nothing until you ask the company to send you a cheque for your lump sum.

dunroving

40 years? In 40 years, the UK government will be annexing private pensions to prop up national insurance. No point moving it to the US, because the US Gubbmint will be doing the same to prop up social security

But seriously, if you are that young, I'd just let it sit for now. You might no longer be in the US in 40 years (or even 5 years). And depending on what types of investments you have it invested in, I'd say in 40 years it could grow quite consierably.

You might also want to look for some of the threads on maintaining UK NI payments after you move overseas.

Knight

Yeah, I've already spoken to the DWP about my NI contributions, and I am still debating if I want to go down that route, as I still have many years of contributions to make. If I was older, I may go with it, but in my position I am not so sure.

I do plan on just letting the UK Company Pension stay in the UK, I just want to understand what I have to do in the US in regards to having a pension fund maturing in the UK, like if I have to declare it from the get go, or only when I cash it in.

Patrick Hasler

I did notify the company and they send me a statement every year.

TRPardoe

Late last year I started taking my Merchant Navy Pension. At first it was taxed PAYE in the UK but I got forms from the Inland Revenue to fill out and send to the IRS. The IRS then fill out their part and send them back to the IR.

I just was notified that the Inland Revenue have sent a cheque for my tax refund for 2006/2007 to my lawyer in the UK and the IR notified me by mail that the Pension Fund will be refunding directly to me for the tax I have paid since April this year.

I do not have to notify the IR again unless I stop being a US resident and taxpayer. They assume that if they hear nothing that I am still a resident here.

Of course, now I have to remember to stash the refunds and also top them up to pay the US taxes.

Giantaxe

In general, I agree with this. However, if "another country" = the UK, then the UK/US tax treaty will allow you to avoid tax on Roth IRA withdrawals in the same manner that they avoid tax in the US. Ditto withdrawal of non-deductible contributions to a regular IRA.

If I was sure I was going to live in the US or the UK throughout retirement, I would contribute to a Roth; as I can well imagine living at least part of the year elsewhere, I too am avoiding doing so.

dunroving

My understanding of the tax treaty is that it allows you to avoid double taxation, i.e., you won't get taxed in the UK on income you have already been taxed on in the US (and vice versa). I'm not so convinced it means you won't get taxed in the UK on Roth IRA income - which you have not been taxed on in the US (sure, you pay post-taxt income INTO a Roth IRA, but I'm not so sure that the UK would recognize the tax-exempt status on Roth income that the US does.

If you know otherwise for sure, I'd be glad to stand corrected. There was a thread on endowments (which are tax-exempt in the UK) on here recently, and the consensus seemed to be that if you declared endowment income to the IRS, you'd get taxed on it.

Giantaxe

Pages 2 and 3 of this document have some commentary on the tax treaty treatment of pensions/annuities. In particular, note this comment:

"state of residence must exempt from tax any amount of the pension or similar remuneration that would be exempt from tax in the country where the pension scheme is established, if the recipient were resident in that country. For example, a distribution from a Roth IRA to a U.K. resident would be exempt from U.K. tax to the same extent the distribution would be exempt from U.S. tax if it were distributed to a U.S. resident."

http://www.us.kpmg.com/microsite/tax...s/fa03-071.pdf

The UK/US tax treaty is also online if you want to wade through 150 pages.

dunroving

Thanks (for the clarification), but no thanks (to the idea of reading 150 pages of the tax treaty).