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US/UK tax treaty - 25% Pension Commencement Lump Sum

US/UK tax treaty - 25% Pension Commencement Lump Sum

Old Jan 21st 2024, 6:26 am
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Arrow US/UK tax treaty - 25% Pension Commencement Lump Sum

Hello everyone.

We are trying to decide whether to retire in the US or return to the UK.
One of the biggest factors is how the IRS will treat our UK pension savings if we stay in the US.

I came across the following 2 articles that states that the IRS will honor the tax-free 25% pension commencement lump sum, per HMRC rules.
No idea if theory or whether their clients have been successful in getting the IRS to not tax PCLS!

https://www.castroandco.com/blog/202...ith-uk-pensio/

https://www.castroandco.com/blog/201...distributions/


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Old Jan 21st 2024, 11:54 am
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Default Re: US/UK tax treaty - 25% Pension Commencement Lump Sum

Almost all professionals agree that the 25% tax free lump sum is taxable by the IRS. A very small minority disagree and those who disagree never provide any evidence or statistics relating to success. Look at the wording of their “Solution” carefully. It is very vague, and relies upon splitting hairs in legalities. I would contact them and ask about their success rate, the costs involved and potential penalties if their argument is denied. Personally, I think they take the approach of throw it out there to the IRS, see what happens and deal with it if it becomes an issue. Undoubtedly some such returns will slip by the IRS because they never get looked at but the rest will and then you have to deal with the fallout from that.

Here is a link of someone who was successful taking a slightly different approach.UK Pensions related to UK/US Tax Treaty. It you are feeling lucky and willing to accept the potential consequences if the IRS don’t agree with your approach then go for it, and report back because many would love for this position to be true (including me). But if using a professional understand the costs involved in taking the original position because they will take a large slice of any savings, and also ask what the costs will be to resolve any issues that may arise from taking the tax free position. That won’t be cheap either.

In any case if paying tax on 25% of your pension lump sum is a key factor in deciding whether or not to retire over here, then personally I think you are letting the tail wag the dog.
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Old Jan 21st 2024, 1:32 pm
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Default Re: US/UK tax treaty - 25% Pension Commencement Lump Sum

Glasgow Girl I have just read through the whole thread you linked to. wow - what a complicated topic! I think it best to assume then that 25% PCLS is taxable by IRS.


Your comment about not letting the (tax) "tail wag the dog" really resonate.

Our preference would be to retire in the US but our circumstances are not straightforward so not sure if feasible.
  • We are GC holders, not USC
  • I am the sole breadwinner in our household with a very low interest rate US mortgage
  • I need to work until 2026 to earn the minimum credits to qualify for social security
  • I'm burnt out at work with health issues
  • My husband has health issues that require regular monitoring by GP and specialist consultants
  • My husband has a tiny 401k pot but the rest of his DB, DC & SIPP pensions are in the UK (8 in total) and kick in between this year and 2029. Individually, they are all modest but together with the State Pension means very comfortable income.
  • I have a reasonable DC & SIPP pension pots in the UK and my own 401k is also reasonable.
  • Prior UK home (with mortgage) has been rented out more than 5 years so if we were to sell, we would have to pay substantial capital gains tax to the IRS.
  • Ailing parents on both sides who are not living in the US (and they can't travel).
So need to figure out a plan :-(


I would love to hear from folks on what they would do in our situation.
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Old Jan 21st 2024, 4:18 pm
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Default Re: US/UK tax treaty - 25% Pension Commencement Lump Sum

First thing I would do is to check out you and your spouses eligibility for Medicare. Absent full Medicare coverage, with health issues it may be prohibitively expensive to live in the USA as compared to the UK.
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Old Jan 21st 2024, 6:39 pm
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Default Re: US/UK tax treaty - 25% Pension Commencement Lump Sum

No, we are not eligible for Medicare.

Yes definitely more expensive here and long wait lists in the UK apparently!
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Old Jan 21st 2024, 8:15 pm
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Default Re: US/UK tax treaty - 25% Pension Commencement Lump Sum

Originally Posted by Cric
No, we are not eligible for Medicare.
Do you anticipate ever being eligible? And if so how many years until you are? If you are not now, and maybe never will be eligible, you can buy insurance through the ACA marketplace even beyond age 65 but it just keeps getting more and more expensive the older you get. ACA plans are generally HMO with large deductibles so being able to visit your preferred specialist might be an issue. I know one green card couple in their late 60's who were not eligible for Medicare and they threw in the towel and went back to the UK because of deteriorating health and increasing insurance costs.
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Old Jan 21st 2024, 10:38 pm
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Default Re: US/UK tax treaty - 25% Pension Commencement Lump Sum

Originally Posted by Pierre_Tete
Do you anticipate ever being eligible? And if so how many years until you are?
I need to work another 2 years to get the credits to qualify for SS/Medicare...and then would have to wait around a decade to claim.

Originally Posted by Pierre_Tete
you can buy insurance through the ACA marketplace even beyond age 65 but it just keeps getting more and more expensive the older you get. ACA plans are generally HMO with large deductibles so being able to visit your preferred specialist might be an issue..
This is on my list to investigate.

Originally Posted by Pierre_Tete
I know one green card couple in their late 60's who were not eligible for Medicare and they threw in the towel and went back to the UK because of deteriorating health and increasing insurance costs.
This does not surprise me at all - worrying about medical bills wiping you out in old age is not a great position to be in.
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Old Jan 22nd 2024, 12:14 am
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Default Re: US/UK tax treaty - 25% Pension Commencement Lump Sum

Originally Posted by Cric
I need to work another 2 years to get the credits to qualify for SS/Medicare...and then would have to wait around a decade to claim.
So I guess you are early-50's. You can get Medicare with less than 10 years SS if you've been a resident for 5+ years I think, but you then have to pay the premium for Medicare Part A which ain't cheap, so definitely worthwhile to get the minimum 10 years credits.
Also, perhaps you are aware, or maybe not, that if you buy a policy through the ACA at any age you can game the system to get subsidies. If you are not working and able to live off cash savings your apparent taxable income can be made as low as you like, right down to the Medicaid cutoff. If you get your taxable income down that low your ACA policy will likely cost you nothing. This is all highly personal depending on your finances but it is not at all uncommon for early retirees late-50's early-60's to move investments out of interest and dividend generating assets into cash for this very reason, though it's all a balance with cheaper insurance vs lost investment income, and having enough funds in the first place to even consider it. I even designed my own spreadsheets to compute this stuff as I will be retiring soon.

Last edited by Pierre_Tete; Jan 22nd 2024 at 12:16 am. Reason: Spelling
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Old Jan 28th 2024, 1:44 pm
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Default Re: US/UK tax treaty - 25% Pension Commencement Lump Sum

Originally Posted by Pierre_Tete
So I guess you are early-50's. You can get Medicare with less than 10 years SS if you've been a resident for 5+ years I think, but you then have to pay the premium for Medicare Part A which ain't cheap, so definitely worthwhile to get the minimum 10 years credits.
Also, perhaps you are aware, or maybe not, that if you buy a policy through the ACA at any age you can game the system to get subsidies. If you are not working and able to live off cash savings your apparent taxable income can be made as low as you like, right down to the Medicaid cutoff. If you get your taxable income down that low your ACA policy will likely cost you nothing. This is all highly personal depending on your finances but it is not at all uncommon for early retirees late-50's early-60's to move investments out of interest and dividend generating assets into cash for this very reason, though it's all a balance with cheaper insurance vs lost investment income, and having enough funds in the first place to even consider it. I even designed my own spreadsheets to compute this stuff as I will be retiring soon.
Pierre_Tete Thank you for the heads up on ACA policy - this is something I will definitely look into
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Old Jan 29th 2024, 4:16 pm
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Default Re: US/UK tax treaty - 25% Pension Commencement Lump Sum

Originally Posted by Glasgow Girl
Almost all professionals agree that the 25% tax free lump sum is taxable by the IRS. A very small minority disagree and those who disagree never provide any evidence or statistics relating to success. Look at the wording of their “Solution” carefully. It is very vague, and relies upon splitting hairs in legalities. I would contact them and ask about their success rate, the costs involved and potential penalties if their argument is denied. Personally, I think they take the approach of throw it out there to the IRS, see what happens and deal with it if it becomes an issue. Undoubtedly some such returns will slip by the IRS because they never get looked at but the rest will and then you have to deal with the fallout from that.
For some reason, the IRS is vague on this issue and doesn't take a position, but there is a threat of "punishment" if you don't pay the tax. How about taking an approach of paying the tax on the 25% lump sum, and then submitting a modified tax return claiming that tax back with the double taxation agreement arguments? The IRS would then have to accept or deny that claim... You may not get your tax back, but what is there to lose? I know of one expat that didn't pay the tax quite a few years ago, and there have been no negative consequences.
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