Thoughts on Delaying Claiming Civil Service Classic Pension

123kth

Hello, first post here, as I noticed some great advice on Civil Service pensions in the forum. I would be grateful for any thoughts or experience on my current dilemma as to when to claim my preserved civil service classic pension. Here's the situation:

I turned 60 this year, so am eligible to claim my preserved Classic pension and lump sum (30 year's service, left in 2015 - so it's a reasonable amount). However, I am now a US citizen and am employed full time in the US. My wife also works, so this pushes our marginal tax rate up to 32 or 35%. Were I to claim the pension now, I would pay that marginal rate on both the lump sum (taxable in the US) and the pension - which would be unpleasant. My plan is therefore to defer claiming until our taxable income is much reduced, which may not be until 2-3 year's time.

I know that there are a few risks here: I might die (although I'm currently healthy); the exchange rate could go further south; there could be some legislative change in the UK; I'm missing out on the opportunity to invest anything left after the IRS has take their share.

Is there anything else am I missing? Thanks in advance!

Sam_666

You are working, so you should have steady income to support yourself.
If you plan to stop working in 2-3y, then this is when to take pension, it would be more tax effective.
Keep in mind you wont get tax free payments from IRS, even if HMRS gives it free.
Check tax status of each state, as they vary.

DRS1

When you stop work in the USA what will you do?  Move back to the UK?  If so maybe don't take the pension/lump sum until you are safely out of the clutches of the IRS

If you don't take the pension at 60 do you lose anything?  2 or 3 years worth of pension maybe but do early retirement factors have an impact on that?

If you take the pension now can you offset the additional tax by making extra pension contributions in the USA?  Assuming you want to have a US pension.

Do you need to take any lump sum?  What about maxing out the pension?

hugheskevi

I would be grateful for any thoughts or experience on my current dilemma as to when to claim my preserved civil service classic pension. 

As you probably know, as you are deferred, when you do claim the pension you will receive:

• Pension arrears equal to what you would have been paid had you claimed at age 60. The arrears will include the pension increases you would have got had you claimed the pension age 60. 
• The automatic lump sum you would have been paid had you claimed your pension at age 60.
• An ongoing pension that includes the increases that would have been applied since 60

Were I to claim the pension now, I would pay that marginal rate on both the lump sum (taxable in the US) and the pension - which would be unpleasant. My plan is therefore to defer claiming until our taxable income is much reduced, which may not be until 2-3 year's time.

Are you 100% certain about the taxation of arrears paid for a past period? In 2-3 year's time you would get a payment of taxable income that, if you wish, you could apply to HMRC to attribute to the past year it is applicable to and tax it accordingly. I have no idea how the US tax authorities would view this.

I know that there are a few risks here: I might die (although I'm currently healthy); the exchange rate could go further south; there could be some legislative change in the UK; I'm missing out on the opportunity to invest anything left after the IRS has take their share.

Is there anything else am I missing? Thanks in advance!

I think the main thing is the loss of investment opportunity. There is no interest paid on the arrears, nor any late payment uplift, so you just get the cash amount in a few years. During that time you could have got returns on that money that you are foregoing. The key question is whether the tax advantage would outweigh that or not.

DRS1 said:

Do you need to take any lump sum?  What about maxing out the pension?

The lump sum is automatic. It can be converted into pension via inverse commutation, but the commutation rate is set actuarially, making it far less generous than the 12:1 rate paid when members commute pension into lump sum - the inverse commutation rate is going to be closer to 20:1 (essentially a very large buy/sell spread operated by the scheme).

123kth

Thanks for the helpful responses here. Really appreciate the viewpoints. Just to address a few of them:

Unfortunately the option to do inverse commutation is no longer available after pension age. Which actually was my initial thinking to do, even though the conversion rate is somewhat unattractive. Therefore I now have no option but to take the lump sum and most likely pay tax on it in the US. As a US citizen that wouldn't change even if I moved back to the UK - you can't escape the clutches of the IRS by moving abroad.

Also, my understanding is that I will have UK tax deducted at source, at the applicable rate for the years in which the pension would have been paid. That's not really a factor, as I will just declare that on my US tax return for the year in which I receive the money, and receive a credit. I don't believe I will have to re-file taxes for previous years in the US.

I guess the decision comes down to the missed investment opportunity (which is of course not a guaranteed winner over a relatively short number of years, particularly with the current market) and the difference in my marginal tax rate next year versus that when I do retire. I would estimate that to be 22% in retirement against 32 or 35% next year. We are also maxing out our 401K (retirement fund) contributions, so there is no scope to offset pension income and save tax that way.

First world problems, I am aware and thankful.

DRS1

Ah sorry I missed the US citizen bit in the first post.  Still if you came back to the UK you can always give up the US citizenship (assuming you are also a UK national).