expat UK pension pot as lump sum

yummy_marmite

Looking for feedback on possible problems or things i've overlooked with following plan.
I've lived and worked in the US for more than 20 years and this is where i have home, investments, pension, etc and plan on staying. I have a UK pension pot with Abbeylife from a DRP i had before i emigrated to the USA. This is GBP 23K in a retirement fund, GBP 6K Former protected rights fund.
I'll be 60 in November which is the retirement date i selected when i originally purchased the Hill Samuel now Abbeylife product.
I don't have any other UK pension plans or other sources of income from the UK. I have not had any reason to file a UK tax return for more than 20 years.
My plan is to contact Abbeylife and take the whole GBP 29K as a lump sum minus whatever fees and taxes Abbey withholds at the emergency rate. I'll then file for a tax return. Since this is my only income i'll ultimately pay 20% tax on 75% of this minus my 2018 personal allowance of GBP 11K so eventually taxes at 20% on about GBP 10.5K
I'll then just deposit the proceeds into my US bank and move on, the USA won't treat this as income since i'll be reporting that it has already been taxed in the UK. I could probably structure this slightly better so i could take advantage of my tax allowances over more than one year but then i'm not sure it will be worth the hassle of transferring out of Abbey, requesting multiple withdrawals, dealing with multiple UK tax returns from the US etc
I really want to avoid ending up with a UK annuity for a couple of hundred GBP a year that i have to keep track of, pay bank exchange fees etc etc
I appreciate any feedback or suggestions on better approach - thanks!

EdSwippet

yummy_marmite wrote: »

Since this is my only income i'll ultimately pay 20% tax on 75% of this minus my 2018 personal allowance of GBP 11K so eventually taxes at 20% on about GBP 10.5K. I'll then just deposit the proceeds into my US bank and move on, the USA won't treat this as income since i'll be reporting that it has already been taxed in the UK. I could probably structure this slightly better so i could take advantage of my tax allowances over more than one year ...

This sounds like you believe you have a choice over which country gets to tax your pension withdrawals, but in reality you don't. They both have a claim on it, and you need to consult the US/UK tax treaty to find out how it's actually treated. The answer is in Article 17, which reads in part:

1. (a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.
(b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first mentioned State.
2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State.

Translated into English... a lump-sum payment from your UK pension -- that would be everything all in one go -- would be taxed only by the UK, but regular withdrawals would be taxed only by the US.

Given the above, you should be able to work out the best way forwards for your situation. From your brief description it sounds like a one-off lump-sum might work out reasonably well for you. You'll probably have to fiddle about with form 8833 to claim this treaty relief against US federal tax, though. Also, be aware that many individual US states do not recognise the US/UK treaty, so depending on where you live you may well still face a state income tax liability on this lump-sum withdrawal, even though no federal tax to pay.

bostonerimus

You can inform HMRC of your desire to use the tax treaty by filing a US-Individual2002. Then if you take the lump sum you can use Article 17 so that only UK tax is due and you'll have an extra bit of documentation for the IRS when you claim the US federal tax treaty 0% rate using 8833. Ed makes a good point that you will still have to pay US state tax if you live in a state that doesn't recognize the tax treaty.....the question is then whether you can get that tax back from HMRC.

Or you could just take the money out in small amounts so that it qualifies as income and use the treaty or your UK personal allowance (which you can claim on HMRC form R43) to avoid UK tax. Then you would just have to enter the pension income on your 1040 and state tax forms.

EdSwippet

bostonerimus wrote: »

Ed makes a good point that you will still have to pay US state tax if you live in a state that doesn't recognize the tax treaty.....the question is then whether you can get that tax back from HMRC.

The list of US states and their taxes for which HMRC allows a credit is in section DT19855 of the double-tax relief manual.

A potentially unopened can of worms here for the OP is that where a US state does not recognise the US/UK tax treaty, dividends, capital gains, and other accruals inside a UK pension can become... er... theoretically... taxable annually to the state as they arise, rather than only on withdrawal. If that can is currently unopened, it is probably best just left that way.

Silvertabby

EdSwippet wrote: »

The list of US states and their taxes for which HMRC allows a credit is in section DT19855 of the double-tax relief manual.

A potentially unopened can of worms here for the OP is that where a US state does not recognise the US/UK tax treaty, dividends, capital gains, and other accruals inside a UK pension can become... er... theoretically... taxable annually to the state as they arise, rather than only on withdrawal. If that can is currently unopened, it is probably best just left that way.

Not just theoretically, it seems. A LGPS deferred pensioner wrote to us every year for confirmation of how much his pension fund had increased in 'value' for his US tax return.

bostonerimus

Silvertabby wrote: »

Not just theoretically, it seems. A LGPS deferred pensioner wrote to us every year for confirmation of how much his pension fund had increased in 'value' for his US tax return.

There are separate rules for government pensions that include citizenship status as well as residency.

If the OP lives in a state that recognizes the US/UK tax treaty then it's a pretty simple choice; either take the lump sum and pay income tax in the UK and apply for treaty 0% rate on the Federal and state taxes or take the money in small amounts that can be argued to be pension income and pay no UK tax just US Federal and State tax.

So can the OP tell us where they live in the US...if it's somewhere like MA the it's pretty simple as MA recognizes the tax treaty, if it's CA then things could get complicated.

EdSwippet

Silvertabby wrote: »

Not just theoretically, it seems. A LGPS deferred pensioner wrote to us every year for confirmation of how much his pension fund had increased in 'value' for his US tax return.

It could be that this person was paying actual tax to some US state or another annually on accruals here, but my guess is that would be pretty unlikely for a defined benefits pension. More likely a 'value' was needed for annual 'information' reporting. Here there is no actual tax liability, just a lot of intrusive -- and frankly, rather pointless -- probing.

US resident taxpayers have to annually report the account numbers, name and address of provider, and the maximum balance of foreign accounts above $10k in aggregate on FinCEN form 114, and above $50k in aggregate on FATCA form 8938. For many folk this can be completely duplicative, but that's the IRS for you -- eventually US taxpayers just knuckle under and accept more and more of this type of nonsense. Non-US pensions can count as 'foreign accounts' for this purpose. For people with the audacity to hold any accounts outside the US, a US annual tax filing is more like a fiscal enema than an actual tax return.