Tax on UK pensions?

[QueenOfBlades 224]

I've just been looking up some stuff on here -

http://www.hmrc.gov.uk/incometax/tax-leave-uk.htm

It says that "If you're non-resident, you'll pay UK tax on your UK pensions - including your State Pension. You may not pay UK tax if the country you live in has a 'double taxation' agreement with the UK."

I currently have a pension with my company, Centrica, and the pension company is Mercer, which both operate in the US. I won't be working for them in the US, but I just assumed my pension would be frozen when I left and I'd pay into it again in the US when I chose and it'd convert to USD.

Do I need to do anything other than file P85, and does this mean I'll still have to pay stuff to the UK? :S

[Owen_London 65]

I've just been looking up some stuff on here -

http://www.hmrc.gov.uk/incometax/tax-leave-uk.htm

It says that "If you're non-resident, you'll pay UK tax on your UK pensions - including your State Pension. You may not pay UK tax if the country you live in has a 'double taxation' agreement with the UK."

I currently have a pension with my company, Centrica, and the pension company is Mercer, which both operate in the US. I won't be working for them in the US, but I just assumed my pension would be frozen when I left and I'd pay into it again in the US when I chose and it'd convert to USD.

Do I need to do anything other than file P85, and does this mean I'll still have to pay stuff to the UK? :S

I used to work for Centrica, ten years ago, and still have an old final-salary pension with them. My (small) pension will pay out once I reach retirement age, but it is basically frozen until then. It will pay out in pounds, and I'll convert it to USD. Centrica have several different pension schemes, though, which work differently, and different pension types also get taxed differently in the US.

The US does have a taxation treaty with the UK, so you should probably be able to avoid UK tax.

If the pension is through Centrica, I'd be very surprised if you'd be allowed to contribute further to it once you've left the company, even if you were still in the UK. You haven't provided us with enough info to really be able to tell. I suggest you read through the pension info from Mercer, and talk to them if you have any questions.

[QueenOfBlades 224]

I used to work for Centrica, ten years ago, and still have an old final-salary pension with them. My (small) pension will pay out once I reach retirement age, but it is basically frozen until then. It will pay out in pounds, and I'll convert it to USD. Centrica have several different pension schemes, though, which work differently, and different pension types also get taxed differently in the US.

The US does have a taxation treaty with the UK, so you should probably be able to avoid UK tax.

If the pension is through Centrica, I'd be very surprised if you'd be allowed to contribute further to it once you've left the company, even if you were still in the UK. You haven't provided us with enough info to really be able to tell. I suggest you read through the pension info from Mercer, and talk to them if you have any questions.

Thanks for your reply. I'm not in the final salary pension. What I had planned to do is just freeze the pension, convert it into the equivalent of what it's worth and pay into it again with a new employer when I'm working in the US.

My main question really is - if you have paid into a private pension in the UK, what do you do when you move to the US? Do you still have to pay tax on it? I'd assumed I could just relocate it like you do if you move from one company to another in the UK.

[Owen_London 65]

Thanks for your reply. I'm not in the final salary pension. What I had planned to do is just freeze the pension, convert it into the equivalent of what it's worth and pay into it again with a new employer when I'm working in the US.

My main question really is - if you have paid into a private pension in the UK, what do you do when you move to the US? Do you still have to pay tax on it? I'd assumed I could just relocate it like you do if you move from one company to another in the UK.

This is a can of worms, but as I understand it you cannot relocate a pension from the UK to US, despite there being a few companies out there claiming that you can. Your UK pension will be frozen until you retire or return to the UK, and you will need to open a 401k once you have a job in the US.

[QueenOfBlades 224]

So the pension I have now is completely useless despite the fact it's private and my money I've been paying into it and not related to the state whatsoever? That can't be right surely?

[Owen_London 65]

So the pension I have now is completely useless despite the fact it's private and my money I've been paying into it and not related to the state whatsoever? That can't be right surely?

Useless? The money is still there, and gathering interest, and it will pay out when you retire, so no.

The UK rules that apply to your pension do not change, but you cannot transfer it into a US pension scheme (401k, IRA etc.), and depending on what you choose to do with it, you might get hit for US taxes by the IRS even if the income would have been tax-free in the UK.

There's a lot of discussion of US taxation of UK pensions on the britishexpats forum, that Boiler posts on. If you want more qualified info and advice, you might want to go there.

If you have a significant amount of money in your UK-based pension or other investments, you will probably want to engage a CPA (certified public accountant) in the US who is experienced with the details of the UK/US tax treaty. The US has probably the most unnecessarily complicated tax system in the world, and foreign-held investments and pensions are two things that make it get really complicated.

[Nich-Nick 3,354]

I agree with Owen that your pension won't transfer to a US pension. You put it away for your old age, right? Isn't that the purpose of a pension plan? It will be there in the UK and when you reach the right age, you start getting pension checks in the US from it. It will be reported on your US tax return, along with your American pension or 401k distributions which you will hopefully have. If you want to read about it, start here http://www.irs.gov/Businesses/The-Taxation-of-Foreign-Pension-and-Annuity-Distributions , but tax laws change like the wind, so it could be quite different by the time you retire.

[HikerMark 5]

Under the UK/US tax treaty any UK pensions will only be taxed in the US if you are a US resident at the time of drawing the pension. In addition, if you take advantage of the UK rule allowing you to take out 25% tax free when you first start drawing the pension, the US is required to follow that rule even though there is not a similar provision in the US tax code.

In the meantime the only US tax reporting you need to worry about for UK pensions is the FBAR (due on June 30) and form 8938 for the US tax return. If you have UK defined contribution pension schemes you may need to report them on these forms if their values are high enough. The pension is not taxed by these forms as they are information returns to enable the US Government to track your overseas investments.

[Owen_London 65]

Mark,

I'm happy to agree with your second paragraph, but the first is controversial.

When I searched for "Uk US pension tax", or similar, the first thing to come up were two threads on britishexpats.com that stated most but not tax specialists believe that the lump sum is not free from US tax.

[QueenOfBlades 224]

Under the UK/US tax treaty any UK pensions will only be taxed in the US if you are a US resident at the time of drawing the pension. In addition, if you take advantage of the UK rule allowing you to take out 25% tax free when you first start drawing the pension, the US is required to follow that rule even though there is not a similar provision in the US tax code.

In the meantime the only US tax reporting you need to worry about for UK pensions is the FBAR (due on June 30) and form 8938 for the US tax return. If you have UK defined contribution pension schemes you may need to report them on these forms if their values are high enough. The pension is not taxed by these forms as they are information returns to enable the US Government to track your overseas investments.

Thanks for the replies.. This is the sort of thing I'm worried about, that there's something I need to file because of my pension and I'll miss it offand get in trouble. So I need to file that FBAR thing because of my pension? It won't be a huge amount. Will I need to do this every year?

Edit: It says on the FBAR link on the IRS that certain things are exempt from FBAR, inc.

1. "Participants in and beneficiaries of tax-qualified retirement plans;"

Does that mean I don't have to do FBAR? :S

Edited June 29, 2013 by QueenOfBlades

[HikerMark 5]

Mark,

I'm happy to agree with your second paragraph, but the first is controversial.

When I searched for "Uk US pension tax", or similar, the first thing to come up were two threads on britishexpats.com that stated most but not tax specialists believe that the lump sum is not free from US tax.

Owen, thank you for pointing that out.

When looking at the US/UK tax treaty I always forget about the "savings clause" Article 1(4). Subject to the exceptions in Article 1(5) this allows the US to tax its citizens and residents as if the tax treaty did not exist. In otherwords on worldwide income. Unfortunately lump sum pensions are not included in Article 1(5). I also found a 2008 letter from the IRS which confirms their interpretation of the treaty and that UK lump sum pensions are taxable in the US. :-(

Another thing to add to the list of tax issues that people moving from the UK to the US need to be aware of.

i.e. Pension lump sums, FBAR, Form 8938, PFICs, ISAs, VCTs, Form 5471.

[HikerMark 5]

Thanks for the replies.. This is the sort of thing I'm worried about, that there's something I need to file because of my pension and I'll miss it offand get in trouble. So I need to file that FBAR thing because of my pension? It won't be a huge amount. Will I need to do this every year?

Edit: It says on the FBAR link on the IRS that certain things are exempt from FBAR, inc.

1. "Participants in and beneficiaries of tax-qualified retirement plans;"

Does that mean I don't have to do FBAR? :S

The FBAR is required every year if in a calendar year the total value of all your foreign financial accounts exceeds $10,000 at any time in the year. Financial accounts includes the obvious ones such as bank accounts, unit trust savings accounts, investment trust savings accounts, brokerage accounts, ISAs etc plus defined contribution pension plans. In the UK this would mean personal pension plans and some company pension plans where the pension you get is based on the fund value rather than your final salary. UK final salary schemes are not reported on the FBAR but are reportable assets for the form 8938.

The exception for "Participants in and beneficiaries of tax-qualified retirement plans;" is for US pension funds such as 401Ks.

The form 8938 needs to be attached to your US tax return for a married couple living in the US if the total value of their foreign financial assets exceeds $100,000 at the year end or $150,000 at any time in the year. Foreign financial assets for this form is a much wider range of assets than for the FBAR. It also includes defined benefit pension schemes (ie UK final salary schemes) as well as direct holdings of foreign corporations or partnerships.

All I can say, is welcome to US tax reporting for Green Card holders who keep any of their foreign assets.