Advice on retirement savings

patni

I was wondering if there was someone who could advise me in the situation I am facing as it is not something that I was able to find an answer to in an internet search.

I was employed in the USA for about 6 years from 1999-2005. During the period of employment, I had contributed to a retirment plan offered through my employer, referred to as a 401K plan. This is similar to a pensions plan in the UK, with a notable exception that the money in the 401K can be withdrawn anytime after paying taxes and a fine of 10% if withdrawing before retirement age. The contributions to this plan were done monthly through the pay cheque and were before taxes.

I came to the UK in 2005 and am currently a citizen and reside here. The money contributed has stayed in US and is invested mostly in Vanguard and about 10% in a bond mutual fund. The amount is significant for me( > $30K), but am in no immediate or forseeable need for it. A year ago, I got a letter from my platform provider stating that I will not be able to purchase new funds (no change to existing) owing to the fact that I am not a US resident any more. Also, the 401K account has now been converted into an IRA account (again similar to pensions, but is independant of the employer).

Questions:

• Should I leave my money as it is in the US? I would prefer this to happen ideally. Are there any drawbacks to this? I would want to withdraw the money only when I retire.
• How would the UK tax man view this when I do decide to bring the funds to the UK? I am currently on PAYE
• How would I declare this money to the UK tax man? Do I need to since the income was made in a period when I was neither a UK citizen nor was I a resident of UK?
• Leaving aside US tax implications, what would be the best way to bring funds to UK from UK tax perspective?

I would really appreciate your views on this. Thanks in advance.

xylophone

http://www.hmrc.gov.uk/manuals/eimanual/eim74500.htm
might be relevant.

patni

Thanks for the link. Essentially it seems to state that one would be taxed on 90% of foreign pension funds, if I am reading it correctly . Fair enough... but I thought that there is a dual taxation agreement with US. The IRS will deduct taxes before disbursing, so I would end up paying double tax?

xylophone

http://www.hmrc.gov.uk/pensioners/paying-abroad.htm

"The UK tax you'll pay depends on whether you're 'resident', 'ordinarily resident' or 'domiciled' in the UK. The UK has double taxation agreements with many other countries to make sure that you don't pay tax twice on the same income or gain. If you return to the UK part way through the tax year this is taken into account. You can find out more details about all these issues by following the links below.
Making a claim under a double taxation agreement"

bowlhead99

patni wrote: »

Thanks for the link. Essentially it seems to state that one would be taxed on 90% of foreign pension funds, if I am reading it correctly

Well, from a UK pension you can get a 25% tax free lump sum and only effectively pay tax on 75% of your pension fund. Sounds like for foreign funds, you only pay tax on 90% of the proceeds.

... but I thought that there is a dual taxation agreement with US. The IRS will deduct taxes before disbursing, so I would end up paying double tax?

Anyone reporting foreign income on their tax returns may run into a situation where they end up having foreign tax withheld on their income at source. But as part of doing a tax return you get to claim this back. If you have only ever been on PAYE your affairs are pretty simple so the rest of the tax return form is dead easy, it's not a very intimidating form.

Anyway, the concept of getting credit for foreign withheld tax is pretty straightforward: E.g. you had £100 of investment income coming in from some foreign country, they withheld £18 from you giving you £82; you declare the £100 gross and owe £20 tax on it but fill in an appropriate box to offset the £18 you already paid. Or alternatively you could choose to just declare £82 income and pay your tax on that, but it would give you a worse result.

You can get a bit more of an insight by reading the notes pages to SA106 (the 'foreign stuff' section of a tax return).

Effectively for the US pension it sounds like you put your £xx,xxx in the first box, take the 10% deduction (so you would only be left with the 90% that's taxable), take off the amount of tax paid overseas, and you're left with the relevant amount to pay UK tax on. Alternatively in that section you flag up that you are doing a separate claim for 'foreign tax credit relief', and don't take the withheld amount off on this page, but you do a separate summary of your foreign tax credits elsewhere and still claim them, maybe with a different result.

So, it sounds to me like you can just go ahead and bring back the ~£30k this year if you want. By the time the US provider applies 30% of withholding tax, you might only get ~£20k. You would need to declare your income on a UK tax return. After all, this is all employment income you have never paid tax on (it was taken off you gross) so it's only fair you pay tax when you receive it. But if you're working out UK tax on the gross amount, you'd be claiming back the tax they already deducted.

Of course, having a whole bunch of extra income go through your tax return might not be welcome if you're a higher rate taxpayer (or if this extra £30k takes you there!). So you could consider making UK pension contributions to reduce your current year tax bill. Or throw it into an investment ISA and have a source of tax free income in retirement.

If you don't really need the money immediately there is no massive harm in leaving it where it is. However, if you have restrictions on your fund choice, and can't change providers to get competitive fees, and can't put more money into it ( a bit like a person with UK ISAs who moves overseas), you are probably not going to be able to get the best investment result and it would seem like you ought to bring it back over here?

Then you just need to think about the timing of when you do that - in terms of tax years - if receiving a bunch of overseas income that you can't, or aren't going to, immediately re-pension over here is unwelcome for you.

As an aside if the size of the cheque(check) they're going to write for you is substantial you might want to think of the best way of cashing it - not sure if you have a USD current account? They typically have monthly fees but by getting one you could receive the $50k proceeds without the high transaction costs of trying to clear it into your own GBP current account, and decide for yourself the preferred time to switch it to sterling using the bank or an FX broker.

Hope this helps - but none of the above should be construed as tax advice as I'm not a tax specialist and it might all be nonsense. For some ££ you could probably find a US tax accountant who could give you some peace of mind (particularly if you're anywhere near London where there are a lot of US expats or returned UK expats and people needing to fill out US and UK tax returns and consider international relocation issues).

patni

Thank you so much for the detailed reply bowhead99, it is much appreciated. You have clarified quite a few things which is much appreciated.I will also look into finding a tax accountant that is well versed in US affairs as well. I am close to London, so one should be nearby for me. I will try to find some US expat boards for recommendations for the same unless you have better ideas on how to go about this?

Thanks again.

bowlhead99

I would say US expat, UK expat boards would be a good start. There is a 'cutting tax' board here but it is very generalist. So, if I was looking for a tax accountant familiar with US/UK issues I would focus my efforts on expat/ relocation forums and google, if I didn't have anyone to give a personal recommendation (e.g. former coworkers or friends who might have had the same issues). Find more than one accountant before you engage them.

If you feel you have almost got the answer you may find a call to HMRC to clarify a rule would be cheaper than a tax accountant albeit they probably wouldn't advise you between different choices if there is more than one way to do it which changed the amount of tax.

And while they have access to all the rules, the person you actually get on a callcentre is not necessarily going to be an expert in all of them, beyond what they can read on a screen or leaflet that you could also read on the HMRC site. Still, if you are just wondering whether your particular type of retirement scheme qualifies for the 10% overseas pension tax credit they might be able to point you in the direction of some rules that would help.

I presume your 401k money was rolled over into a Traditional IRA rather than you having already paid some US taxes to get it into a Roth IRA, but there are different types of long term investment accounts so paying a couple of hundred quid to an accountant might be easier than paying more tax than you have to or worrying about having paid too little and getting a fine. In your position I would bring it back to the UK and invest it over here, as if the inefficiencies of running a restricted US scheme are costing you in terms of management fee or investment opportunities, even half a percent a year for 20 years will cost you 9-10% and so could be considered a form of notional 'tax'.