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    • spodrod1
    • By spodrod1 12th Jun 17, 6:58 PM
    • 15Posts
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    spodrod1
    EXPAT - Pension help needed!
    • #1
    • 12th Jun 17, 6:58 PM
    EXPAT - Pension help needed! 12th Jun 17 at 6:58 PM
    Morning all,

    First post and its a question... sorry in advance.

    In 2015 I took the opportunity of a transfer to the US location of my company on a transfer visa. Im a US employee, being paid in dollars to a US bank. The last year I paid tax in the UK was 2014-2015.

    I didnt really give my pension much consideration during the move (which was, in hindsight, foolish). The US company set me up with a 401k plan, which Im paying a fairly small amount into, as Im unlikely to retire in the US and will at some point face the hassle of moving the money back to the UK. Im contributing just enough to get my full employer match.

    However, my concerns relate to my UK pension. Basically, Ive been putting in money as and when I have some free to keep it topped up.

    Ive paid in too much in 15-16 and 16-17. Unaware of the rules, Ive been claiming tax relief over and above the limit (circa 2800 pa). Whats the best course of action on this one? Im really not sure how it works.

    Secondly, Ive found out that a number of pension providers only let you contribute if youre claiming tax relief. Again, I was unaware of this; my plan was just to keep paying in and not claiming tax relief. Assuming my pension provider have this rule, what are my options? I want to keep things simple, as Im unlikely to be in the US forever, but I do want to keep saving for retirement.

    Thanks in advance for your help!
Page 1
    • EdSwippet
    • By EdSwippet 13th Jun 17, 9:11 AM
    • 485 Posts
    • 447 Thanks
    EdSwippet
    • #2
    • 13th Jun 17, 9:11 AM
    • #2
    • 13th Jun 17, 9:11 AM
    I've paid in too much in 15-16 and 16-17. Unaware of the rules, I've been claiming tax relief over and above the limit (circa 2800 pa). Whats the best course of action on this one? Im really not sure how it works.
    Originally posted by spodrod1
    Your limit is indeed £3,600/year gross (£2,880 net). You can apparently use this allowance for up to five years following the year you left the UK, but not beyond.

    To fix the payments over this allowance you would normally declare them under self-assessment and pay the tax due that way. If you filed UK returns for the two years you mention you could amend them. Otherwise, I would just contact HMRC and ask them how best to fix the situation. They may have a process that is less cumbersome than a full-on self-assessment return. The end result is that you will owe UK tax on the over-contribution.

    If the extra UK tax comes to more than £2k you can probably(?) use 'scheme pays'. If that is possible you should definitely use it. Otherwise you face double-tax on this portion of your pension -- now, when you pay the annual allowance excess charge, and again later on when you draw on the pension. Not good.

    Note that even here though, 'scheme pays' does not put you back fully to where you would have been had you not over-contributed (it acts as a tax 'deduction' but not a tax 'credit'). So you want to avoid this over-contribution situation entirely in future. Similarly, your plan to keep paying in and not claiming tax relief is a bad one, because the money would again be taxed on withdrawal.

    So that is the UK tax side perhaps sorted out. Now, hopefully you did not claim any US federal or state tax deductions for any of the amounts you paid into UK pensions. If you did, unravelling that with amended US federal and state returns could perhaps be a large project.

    Cross-border pensions are a nightmare. Doubly so when the US is at one end of the equation. On the plus side, your 401k should behave just like a UK pension when you return to the UK; tax deferred until withdrawals, and taxable to the UK only on regular (non-lump sum) withdrawals under the US/UK tax treaty. Remember though that you cannot transfer a 401k out to a UK or other non-US scheme. No QROPS in the US.
    • bostonerimus
    • By bostonerimus 13th Jun 17, 12:58 PM
    • 498 Posts
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    bostonerimus
    • #3
    • 13th Jun 17, 12:58 PM
    • #3
    • 13th Jun 17, 12:58 PM
    What type of scheme is your UK pension? Is your pension provider aware that you are a US tax resident? How are you dealing with the potential US taxation on your UK pension?

    Cross border pensions are complex and there are pitfalls, however, you'll be able to make withdrawals from a US 401k account when you get back in the UK and if you don't become a US citizen they will only be taxable in the UK.
    Misanthrope in search of similar for mutual loathing
    • spodrod1
    • By spodrod1 13th Jun 17, 2:02 PM
    • 15 Posts
    • 1 Thanks
    spodrod1
    • #4
    • 13th Jun 17, 2:02 PM
    • #4
    • 13th Jun 17, 2:02 PM
    Hi,

    I filed a return for 15-16, but not 16-17, so I should be able to do one of them via this method.

    The tax relief I shouldnt have had is less than 2k in both years.

    Going forwards, I think Im going to pay the max allowable for tax relief over the next 3 years I can and look at other options for saving for retirement in the UK. Not sure of the best options for this, I plan to set up some time with an F.A. to review.

    I didnt claim any tax deductions in the US for these contributions. Bullet dodged there I suppose.

    When I spoke to my 401k company they commented that leaving money in a 401k for a lot of years might not be a good idea, hence theyd recommend me withdrawing as a lump sum when/if I leave the US. Im 38, so assuming Im here for another couple of years, the money could potentially be sat there for 25 years+ if I wait until retirement. If this isnt an issue, Id be tempted to add additional contributions to this, but Im concerned about the risk of doing so...
    • spodrod1
    • By spodrod1 13th Jun 17, 2:05 PM
    • 15 Posts
    • 1 Thanks
    spodrod1
    • #5
    • 13th Jun 17, 2:05 PM
    • #5
    • 13th Jun 17, 2:05 PM
    Hi,

    Its a stakeholder pension. I havent told the pension provider Im working abroad (I simply changed the address to that of my parents). Again, I wasnt told I needed to do this by my company, so didnt think it was an issue...

    From a US taxation standpoint, Ive been declaring it as an oversees pension fund on my tax returns.

    Sounds like utilising my 401k more might not be a bad idea...
    • OldMusicGuy
    • By OldMusicGuy 13th Jun 17, 2:39 PM
    • 89 Posts
    • 132 Thanks
    OldMusicGuy
    • #6
    • 13th Jun 17, 2:39 PM
    • #6
    • 13th Jun 17, 2:39 PM
    Hi,
    When I spoke to my 401k company they commented that leaving money in a 401k for a lot of years might not be a good idea, hence theyd recommend me withdrawing as a lump sum when/if I leave the US. Im 38, so assuming Im here for another couple of years, the money could potentially be sat there for 25 years+ if I wait until retirement. If this isnt an issue, Id be tempted to add additional contributions to this, but Im concerned about the risk of doing so...
    Originally posted by spodrod1
    Are you sure they know what they are talking about? From what I can see, if you take a 401K before age 59.5, you pay an additional 10% tax. Why would you want to do that? If you do a lump sum withdrawal you will incur US tax, not UK tax and from what I can see you would therefore pay an extra 10% on top of federal taxes you would be liable for.

    I have a 401(K) (now an IRA) from 2 years working in the US in the late 90s. I am not taking it out until I am over 59.5. I treat this as an additional investment pot (with different options) which is in USD so I am hoping the dollar stays high until next year......
    • spodrod1
    • By spodrod1 13th Jun 17, 2:42 PM
    • 15 Posts
    • 1 Thanks
    spodrod1
    • #7
    • 13th Jun 17, 2:42 PM
    • #7
    • 13th Jun 17, 2:42 PM
    I suspect they didnt have the first clue what they were talking about....

    Is there any other risk with leaving money in the US for so long? I wouldnt want it to be at risk from any changing legislation etc.

    If its a secure place to invest, then Ill definitely consider starting making additional contributions into it.
    • bostonerimus
    • By bostonerimus 13th Jun 17, 4:15 PM
    • 498 Posts
    • 246 Thanks
    bostonerimus
    • #8
    • 13th Jun 17, 4:15 PM
    • #8
    • 13th Jun 17, 4:15 PM
    I suspect they didnt have the first clue what they were talking about....

    Is there any other risk with leaving money in the US for so long? I wouldnt want it to be at risk from any changing legislation etc.

    If its a secure place to invest, then Ill definitely consider starting making additional contributions into it.
    Originally posted by spodrod1
    There's very little risk in leaving your 401k money in the US. What you should do is contribute as much as you can and the roll it over to an IRA when you leave the company. I'd use someone like Vanguard. Making withdrawals before 59.5 is a bad idea as there's tax plus a 10% penalty.....unless you make the withdrawal conform to something called 72T and you probably don't want to do that.

    You need to tell your UK pension administrator that you are a US tax payer as they probably don't allow the contributions you are making. The IRS will treat your stakeholder pension as a foreign trust so have you file 3520 etc and have you declared the gains for taxation......or are you taking a Treaty position?
    Misanthrope in search of similar for mutual loathing
    • EdSwippet
    • By EdSwippet 13th Jun 17, 5:08 PM
    • 485 Posts
    • 447 Thanks
    EdSwippet
    • #9
    • 13th Jun 17, 5:08 PM
    • #9
    • 13th Jun 17, 5:08 PM
    ... if you take a 401K before age 59.5, you pay an additional 10% tax. Why would you want to do that? If you do a lump sum withdrawal you will incur US tax, not UK tax and from what I can see you would therefore pay an extra 10% on top of federal taxes you would be liable for.
    Originally posted by OldMusicGuy
    Pretty much. There can however be circumstances where taking it as a lump sum could beat taking it over time, due to US tax rates being lower than UK ones. That would mostly apply where the 401k balance is small or modest.

    For example, a $20k lump sum from a 401k reported on a 1040NR runs from 0% through the $4,050 exemption and 10% bands and somewhere into the 15% bracket, producing a net US tax rate of about 10% overall, and 20% with early withdrawal penalty. This is on a par with a UK marginal rate of 20%, and compares well wiith UK marginal rates of 40%, 45%, and 60%. The comparison is even more favourable for smaller lump sums. And very compelling indeed even for much larger sums once aged over 59.5 when the 10% early penalty goes away.

    But yes, drawing on it over time as designed is likely to produce the best outcomes. The lump sum option is going to be most useful where the 401k balance is annoyingly small relative to the hassles of maintaining a foreign pension.

    I have a 401(K) (now an IRA) from 2 years working in the US in the late 90s. I am not taking it out until I am over 59.5. I treat this as an additional investment pot (with different options) which is in USD so I am hoping the dollar stays high until next year......
    Originally posted by OldMusicGuy
    A couple of thoughts on this. Firstly, your currency risk (or reward!) comes from the assets you hold in the IRA, not from the fact that the IRA is itself a US pension plan. If you held a pure FTSE 100 fund in it, for example, you would have eliminated all currency issues relative to GBP.

    Secondly, have you considered converting this IRA over time to a Roth IRA? If done carefully and in stages you could capture a lower tax rate and also defuse possible future RMDs that hit at age 70.5. Under the treaty, Roth conversions are taxable to the US but not to the UK, so by converting gradually you could funnel the balance through US nil and low tax brackets. This assumes you aren't a US citizen or green card holder.
    • EdSwippet
    • By EdSwippet 13th Jun 17, 5:30 PM
    • 485 Posts
    • 447 Thanks
    EdSwippet
    There's very little risk in leaving your 401k money in the US. What you should do is contribute as much as you can and the roll it over to an IRA when you leave the company.
    Originally posted by bostonerimus
    Well, maybe. I thought that way too, while working in the US. However, US tax laws change regularly -- on average daily, with more than 300 tax law changes each year! -- and each change that affects NRAs is unfailingly detrimental.

    The only reason I still have my IRA intact is because I left the US before the 'exit tax' law passed in 2008. Had I stayed, it would have stripped me of more than a third of my IRA on the day I left and turned in the green card. And not just this, but that loss would have been true 'double tax' -- there is no UK tax credit for the US exit tax because it contravenes the US/UK tax treaty.

    Admittedly this is an issue only for former long-term green card holders or ex-US citizens who pass certain asset limit tests, but nevertheless it is a good example of something that could not have been foreseen yet proved extremely damaging when it occurred. With hindsight, I would have limited my 401k contributions to just enough to secure the full employer match, but no more. Or perhaps not taken out a green card. Or perhaps both.
    • spodrod1
    • By spodrod1 13th Jun 17, 7:04 PM
    • 15 Posts
    • 1 Thanks
    spodrod1
    There's very little risk in leaving your 401k money in the US. What you should do is contribute as much as you can and the roll it over to an IRA when you leave the company. I'd use someone like Vanguard. Making withdrawals before 59.5 is a bad idea as there's tax plus a 10% penalty.....unless you make the withdrawal conform to something called 72T and you probably don't want to do that.

    You need to tell your UK pension administrator that you are a US tax payer as they probably don't allow the contributions you are making. The IRS will treat your stakeholder pension as a foreign trust so have you file 3520 etc and have you declared the gains for taxation......or are you taking a Treaty position?
    Originally posted by bostonerimus
    Thanks for that - makes sense. In terms of US tax, Ive been declaring the amount in the pension fund on form 8938 on my tax returns; this is just consistent with what Deloitte did during the year I re-located.
    • spodrod1
    • By spodrod1 13th Jun 17, 7:08 PM
    • 15 Posts
    • 1 Thanks
    spodrod1
    Well, maybe. I thought that way too, while working in the US. However, US tax laws change regularly -- on average daily, with more than 300 tax law changes each year! -- and each change that affects NRAs is unfailingly detrimental.

    The only reason I still have my IRA intact is because I left the US before the 'exit tax' law passed in 2008. Had I stayed, it would have stripped me of more than a third of my IRA on the day I left and turned in the green card. And not just this, but that loss would have been true 'double tax' -- there is no UK tax credit for the US exit tax because it contravenes the US/UK tax treaty.

    Admittedly this is an issue only for former long-term green card holders or ex-US citizens who pass certain asset limit tests, but nevertheless it is a good example of something that could not have been foreseen yet proved extremely damaging when it occurred. With hindsight, I would have limited my 401k contributions to just enough to secure the full employer match, but no more. Or perhaps not taken out a green card. Or perhaps both.
    Originally posted by EdSwippet
    Im currently paying in just enough to my 401k to secure my full employer match. Im also going through the GC application process; its a bit easier for me, as I wont qualify for the exit tax (either on assets or income), so I should be able to rescind my GC if/when I return to the UK.
    • EdSwippet
    • By EdSwippet 13th Jun 17, 7:57 PM
    • 485 Posts
    • 447 Thanks
    EdSwippet
    .. In terms of US tax, Ive been declaring the amount in the pension fund on form 8938 on my tax returns.
    Originally posted by spodrod1
    Also on an annual FinCEN form 114?

    (The US bureaucracy never does anything once when twice will do.)
    • bostonerimus
    • By bostonerimus 13th Jun 17, 8:22 PM
    • 498 Posts
    • 246 Thanks
    bostonerimus
    If you have over $2M and are a long term permanent resident and decide to expatriate, then you will have to mark to market and pay the tax. I get the feeling that the OP is a long way from that.
    Last edited by bostonerimus; 13-06-2017 at 8:28 PM.
    Misanthrope in search of similar for mutual loathing
    • bostonerimus
    • By bostonerimus 13th Jun 17, 8:27 PM
    • 498 Posts
    • 246 Thanks
    bostonerimus
    Im currently paying in just enough to my 401k to secure my full employer match. Im also going through the GC application process; its a bit easier for me, as I wont qualify for the exit tax (either on assets or income), so I should be able to rescind my GC if/when I return to the UK.
    Originally posted by spodrod1
    If you are applying for a GC you should be centering your finances in the US.
    Are you claiming any tax deferral on the contributions to the stake holder pension? and are you comfortable with the status of the stake holder pension under the Treaty so that gains can be tax deferred?
    Misanthrope in search of similar for mutual loathing
    • spodrod1
    • By spodrod1 13th Jun 17, 8:29 PM
    • 15 Posts
    • 1 Thanks
    spodrod1
    Actually no - I reported all my UK bank accounts on 8938 but not on the FBAR; didnt believe I had to do that?
    • spodrod1
    • By spodrod1 13th Jun 17, 8:29 PM
    • 15 Posts
    • 1 Thanks
    spodrod1
    If you have over $2M and are a long term permanent resident and decide to expatriate, then you will have to mark to market and pay the tax. I get the feeling that the OP is a long way from that.
    Originally posted by bostonerimus
    Yes he is ;-)
    • spodrod1
    • By spodrod1 13th Jun 17, 8:30 PM
    • 15 Posts
    • 1 Thanks
    spodrod1
    If you are applying for a GC you should be centering your finances in the US.
    Are you claiming any tax deferral on the contributions to the stake holder pension? and are you comfortable with the status of the stake holder pension under the Treaty so that gains can be tax deferred?
    Originally posted by bostonerimus
    No to the first question....

    Havent thought about the second.... as I say, I honestly didnt give it too much thought...
    • bostonerimus
    • By bostonerimus 13th Jun 17, 8:32 PM
    • 498 Posts
    • 246 Thanks
    bostonerimus
    Actually no - I reported all my UK bank accounts on 8938 but not on the FBAR; didnt believe I had to do that?
    Originally posted by spodrod1
    If you have to file an 8938 then FBAR would be necessary too as it has a lower threshold. Anything that you have signature authority over goes in the FBAR...so bank accounts and probably a DC pension...but not a DB pension. The threshold for FBAR is $10k in total.
    Misanthrope in search of similar for mutual loathing
    • bostonerimus
    • By bostonerimus 13th Jun 17, 8:34 PM
    • 498 Posts
    • 246 Thanks
    bostonerimus
    No to the first question....

    Havent thought about the second.... as I say, I honestly didnt give it too much thought...
    Originally posted by spodrod1
    I would stop paying into the UK pension immediately. If you are doing your own taxes make sure you understand the arguments about whether a stake holder pension is Treaty exempt from current US taxation. Some professionals will say it is, others will recommend treating it as a foreign trust and doing PFIC filings. The first approach is the easiest.

    Now I'll ask if you have any S&S ISAs or other UK investment accounts?
    Last edited by bostonerimus; 13-06-2017 at 8:37 PM.
    Misanthrope in search of similar for mutual loathing
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