# US Citizenship Renunciation and US Pension



## engine987

I am a US citizen (for now) who has lived in the UK for over 30 years and have dual citizenship. Very shortly, I will be renouncing my US citizenship however, I do have a US company pension of a little over $100,000. My plan is to wait until 2016 and possibly take the amount as a lump sum; withholding tax will be taken on distribution but I will owe no further taxes on the amount, except maybe in the UK. I can either leave the pension with the company or transfer it to an IRA before taking the lump sum. However, I need to transfer the amount to the UK but I'm unsure of the best and least expensive way to do this. If the pension is left with the company, I can probably arrange for the amount to be transferred to my UK bank account but the bank's exchange rate will be very poor. I could also open a US bank account (I have relatives in the US) and have the money transferred to that account, then use one of the money transfer web sites, such as TransferWise, to transfer the funds to the UK. 

Question 1: does anyone have any thoughts about the best way of doing this?

Question 2: If the whole amount is transferred to my UK bank, will the UK tax authorities be informed of the deposit?


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## WestCoastCanadianGirl

I'm going to move this to the Expat Tax branch... hopefully someone there will be able to assist you.

Good luck to you!


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## Bevdeforges

OK, first of all, US company pension implies that you worked in the US. If you worked for at least 10 years, you'll also be entitled to your US Social Security benefit once you hit retirement age (62 minimum, or 66 or 67 if you hold out for "full pension"). Even if you don't have a full 10 years in, they will count your years of work in the UK to get you up to the 10 year mark.

Renouncing won't affect your eligibility for the US Social Security - but it may mean that they'll withhold 30% when they pay it out to you. Just something to consider.

But on the company pension - on the transfer of funds, both banks will have to report the transaction (i.e. because it's over $10,000) and normally that means they will have to indicate the source (i.e. that it's a lump sum payout from a pension plan). Don't know what the tax implications are for that in the UK, but yes, the tax authorities will probably be informed.

On setting up a US bank account - if you don't have one now, you may find you have difficulty setting up a new account. In recent years, the banks are pretty strict about this KYC (Know Your Customer) thing, and will require an in-person visit to set up the account. Depending on what company holds the pension fund assets, they may be able to make a transfer (including conversion to GBP) at least as reasonably as an FX company. (Or at least you can ask the question.)
Cheers,
Bev


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## BBCWatcher

There are also reports of ex-citizens having their U.S. accounts closed and/or trading privileges suspended.


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## jbr439

engine987 said:


> ...
> However, I need to transfer the amount to the UK but I'm unsure of the best and least expensive way to do this. If the pension is left with the company, I can probably arrange for the amount to be transferred to my UK bank account but the bank's exchange rate will be very poor.
> ...


Does your UK bank offer US dollar accounts? If so, you could have the money transferred to your new US dollar account and then worry about finding an efficient way to exchange dollars for pounds afterwards. 

Also, if it's a large amount of money then the bank may be able to provide a better rate - it never hurts to ask.


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## engine987

Thanks for all your helpful suggestions. As an update, I have visited the US embassy in London and renounced my citizenship. From what I understand, it will only become official when I get some certificate from the state department.

I have a company in the US willing to open an IRA for me into which I plan to transfer my company pension. My brother, who is an accountant, has told me that with an IRA, one can choose whether or not to have witholding tax applied on taking a distribution. I plan to open a dollar account here in the UK and eventually transfer the money here, in chunks to avoid excessive taxation by the UK authorities.

As I am still a US citizen, an IRA can be opened for me without breaking any rules. Does anyone know if there will be problems on taking a distribution from the IRA when I will no longer be a US citizen?


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## Bevdeforges

engine987 said:


> As I am still a US citizen, an IRA can be opened for me without breaking any rules. Does anyone know if there will be problems on taking a distribution from the IRA when I will no longer be a US citizen?


Actually, yes. As a US citizen, you do have the choice on withholding or not on taking your distribution. As a non-citizen, they will withhold 30% no matter what you ask them to do. There is some question about whether or not you can file an NR return to get back some portion of that 30%, so probably best to consider it a 30% tax on all withdrawals (and be pleasantly surprised if it turns out you can claim some of it back).
Cheers,
Bev


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## BBCWatcher

There's also a penalty if your IRA withdrawals are non-qualified or if your IRA contributions are non-qualified. And there's a bit of risk that a U.S. financial institution will not want to keep an IRA open for a former citizen.

Your "company pension" presumably means a 401(k) plan, right? While you might be eligible to roll a 401(k) into an IRA, you are not required to do so. Assuming I'm correct, is there any particular reason why you want to roll over your 401(k)? What's the advantage you're seeking?

Non-citizen withdrawals from a 401(k), when the time comes, are also subject to 30% withholding. There is a U.S.-U.K. tax treaty that provides for a lower 15% withholding rate, but I think the lower rate only applies to dividends. You can check that, though.


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## engine987

Again, thank you all for your comments and suggestions. I've been reading and researching the taxation of US pensions as a US person working in the UK. 

According to the USA/UK double taxation agreement, if I took a monthly distribution from my US pension, it would be taxed in the UK however, if I took a lump sum payment, it would be taxable in the US. This would apply to both company pensions and IRA's. Since I am technically still a US citizen, I am opening an IRA account (I found a company who will do this). However, whenever I decide to withdraw funds, I will no longer be a US citizen. The IRA provider will probably not know that I am no longer a US citizen. If that is the case, I can withdraw funds with no withholding tax. If I withdraw the funds as a regular monthly payment (the double taxation treaty does not stipulate what constitutes a monthly payment or an amount), the funds are taxable in the UK and, if a lump sum, it is taxable in the US, even though I will no longer be a US citizen.

Does all that ring true? Do any of you absolutely know for sure if that is true or false? If false, what would be the actual way the events would unfold?


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## Bevdeforges

I'm not at all familiar with the US-UK tax treaty, but generally speaking, the US tends to tax all withdrawals from a traditional IRA as "regular income." Frankly, from the US side, there is no difference between a "monthly withdrawal" and a "lump sum" withdrawal - either one is considered income and subject to taxation in the year they are withdrawn. Once you reach age 70 1/2, though, there is a minimum annual withdrawal you must make in order to start running down the total in the account.

I wouldn't count on the IRA holder "not knowing" that you were no longer a US citizen, though. The main control on all this is the fact that the IRA fund reports all withdrawals to the IRS via a 1099, and if you were to take out a large sum (or any sum, for that matter) without filing a tax return for it, I suspect some relevant questions might be asked. 

Frankly, I question the wisdom of opening up an IRA from abroad, particularly if you are planning to renounce. The UK has a very similar retirement funding arrangement that would avoid all this complication. All the IRA does for you is to provide a US based fund which the IRS could impound if they decide you're not playing by the rules.
Cheers,
Bev


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## BBCWatcher

I agree with Bev.

As a further elaboration, there are also Roth IRAs, and some employers offer Roth 401(k)s. The word "Roth" indicates that contributions are after-tax (and of course they must be qualified contributions), and qualified withdrawals are U.S. tax free -- the opposite of most Traditional IRAs and Traditional 401(k)s. (There are Traditional IRAs and Traditional 401(k)s that are funded with after-tax income, but they're used for very specific purposes and rather unusual. Let's set those aside.) However, non-citizens are still subject to withholding from Roth IRAs and Roth 401(k)s. (The withholding is probably refundable in this case, if the withdrawal was qualified, upon filing IRS Form 1040NR.) The U.S. tax free treatment of Roth IRAs and Roth 401(k)s is not necessarily respected by other countries' tax systems, even those that have a tax treaty with the U.S. Other countries may wish to tax the dividends and gains on such accounts.

Roth IRAs and Roth 401(k)s generally have more attractive rules compared to Traditional IRAs and Traditional 401(k)s. As an example, unlike Traditional IRAs and Traditional 401(k)s you are not required to take mandatory minimum withdrawals at age 70 1/2 or at any other age. There are also certain estate/bequest advantages when you pass a Roth to an heir, specifically that (if your heir follows the rules) the tax free nature of the account is maintained and inherited.

I agree with Bev that a U.S. IRA, Roth or Traditional, is unlikely to be particularly useful (or easy) to an individual renouncing U.S. citizenship. In general, if you're renouncing, it's in your interest to make that divorce from the United States a perfectly clean break, with no entanglements. No assets, no family, no important friends, no business interests, not even any yearnings for New York City bagels (or whatever) -- or at least that you're fully prepared to hold such yearnings in check. Now, if you've got a preexisting, employer-based defined benefit pension and/or 401(k) defined contribution plan, OK. Absent a compelling reason or requirement, I'd leave those things alone. Certainly I wouldn't take any non-qualified distributions (that require paying a penalty) -- not unless I'm already in serious trouble and trying to pull funds out to run away as fast as possible from unpaid debts and/or U.S. tax problems. If they're employer-managed funds then it's much less likely the employer's financial manager will arbitrarily close the accounts once the manager becomes aware of your non-citizen status. With individually held accounts there's more such risk of involuntary account closure, closure that could also trigger non-qualified withdrawal penalties. (U.S. financial firms are not legally required to do business or continue doing business with you, even if there are adverse U.S. tax consequences if they choose to end their business relationship with you.)

Anyway, to summarize, you probably just want to "stand pat" and leave those funds where they are, assuming the employer-held plan is at least somewhat decent (meaning, low cost of administration).


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## engine987

Bev, I don't plan on making withdrawals from the IRA without paying tax; I was just pointing out what the tax treaty specifies and how difficult it is to determine to whom tax is due given my circumstances. The reason I want to transfer my US company pension to an IRA is that it gives more flexibility to withdraw funds, unlike the company scheme which gives me 2 choices, a monthly sum for life of a lump sum of the whole pension value.
I presume you are talking about ISA's in the UK? If not, I would like to know what you're talking about. However, I cannot transfer a US pension to a UK scheme - it would be a distribution and I would be taxed (by someone) to the hilt!! 
With the IRA, I fully intend to play by the rules but it's slightly complicated by the fact that sometime after opening the account, I will no longer be a US citizen!!


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## engine987

BBCWatcher,
Thanks for the comments. As you can probably surmise, I have a company pension scheme in the US to which I no longer contribute. I do want to get those funds transferred to the UK asap but I don't want to be excessively taxed. Upon renunciation, I retain my SSN and I can still claim social security payments from the US when I reach the correct age (not long now!!). I believe an IRA or company scheme will still be valid and will pay out even if I'm no longer a citizen.


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## Bevdeforges

As you said, yes, I was talking about an ISA in the UK. There is, however, some question as to whether the treaty provisions for "government pensions" actually applies to self-saving plans in the US like IRAs and 401Ks. Those aren't actually "pensions" in the strict sense of the term and generally are treated as investment accounts or "retirement savings." 

Like I said, however, I'm not familiar with the US-UK treaty, but I did look into transferring my US IRA and 401K here to France a while ago. Determined it was a really really bad idea, because I'd have to pay full tax on withdrawing the funds, and then, if I put the funds into the "standard" French retirement account (i.e. an assurance vie), I'd just get taxed again on the same money (albeit at a preferential rate) in eight years' time as I started to withdraw funds to live on. 

If you're serious about renouncing, I'd leave the IRA where it is and deal with the situation when you get to the point of needing or wanting the money. (And actually, what I did do in my case was to roll over the 401K into the existing IRA simply to have only a single "pot" to have to monitor.)
Cheers,
Bev


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## BBCWatcher

Why would you transfer those funds _now_? If you withdraw those funds before the minimum retirement age (generally 59 1/2) -- I assume you haven't reached that age -- you have a non-qualified withdrawal, subject to a rather hefty penalty of 10% of the withdrawal. You're probably also in a higher tax bracket right now then you'd likely be when collecting U.S. Social Security, so you'll pay a higher income tax on withdrawing that money, and the tax would be owed now rather than deferred (and on money that has had more time to grow with tax deferral).

I don't think it makes financial sense to withdraw that money now. The only reason I can think of why you'd withdraw that money now is if you absolutely need the money for something urgent that you cannot otherwise afford (such as vital cancer treatment the NHS isn't supporting), and higher taxed cum 10% penalty money is the least expensive money available for you to tap. If you fit that description, you probably do not fit the description of an individual who is renouncing U.S. citizenship for any sensible financial reason.


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## BBCWatcher

Bevdeforges said:


> There is, however, some question as to whether the treaty provisions for "government pensions" actually applies to self-saving plans in the US like IRAs and 401Ks.


It's not a question a tax professional would likely ask: it does not, I'm afraid.


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## Bevdeforges

BBCWatcher said:


> It's not a question a tax professional would likely ask: it does not, I'm afraid.


I fully agree that it "doesn't" count as pension for treaty purposes. But I don't know how the treaty is worded. And at this point, I've read about as many of those blasted treaties as I care to.

I do know that the UK has somewhat "different" terms for how they tax US Social Security benefits (see pub 915 for details), so who knows what they have in their tax treaties.
Cheers,
Bev


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## engine987

BBCWatcher,
Unfortunately, I'm 63 and about to retire as my company is making me redundant next week!!


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## BBCWatcher

OK then, why didn't you say so! 

You can withdraw from your 401(k) penalty free since you're past 59 1/2. If it's a Traditional 401(k), you'll pay ordinary U.S. income tax on the full amount of the withdrawal. You can withdraw any amount you wish. If you want to withdraw (don't have to), probably what you'd do is move the funds into the U.K. into an ordinary bank account. A nice approach is to dollar cost average. Let's suppose you want to move the funds to the U.K. over the course of the next 6 months, and let's suppose the funds you want to move total $60,000 just to keep the math simple. One good approach is to transfer $10,000 per month, for 6 months. That way you'll be buying more pounds when they're cheaper and fewer pounds when they're more expensive. That's called "dollar cost averaging."

Anyway, then, post renunciation, you'd move the funds into whatever U.K. account you wish, perhaps a U.K. tax-advantaged account if available. And you'd "pound cost average" into that new investment, contributing a fixed pound amount each month for some period of time until you've moved as much as you want.

Bear in mind if you withdraw all of the funds (or a large amount anyway) you're likely to "spike" into the higher tax brackets. Note also that you'll need to pay estimated taxes on the withdrawal(s), otherwise you'll owe some interest on late tax payments to the IRS. There's some merit in just leaving the funds where they are and withdrawing them more slowly, when you can moderate the income flow and take advantage of lower tax brackets. (But that "moderation" strategy probably assumes you don't renounce since 30% withholding kicks in right after you do.)

Out of curiosity, what are the upsides of citizenship renunciation for you?


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## engine987

BBCWatcher,
A couple of things - my brother is an accountant in the US. Since the lump sum value of my US pension is about $120,000, he says that the tax I would owe on that, after deductions, etc, would be about $18,000 - that's approx only 15%. So, may just take it as a lump sum and forget about the IRA, then deposit it in a dollar account here. That is assuming, of course, that the UK does not want a piece of that money as well!!
The upside of renunciation is that the 25% tax-free amount of my UK pensions will not be taxed by the US.


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## BBCWatcher

engine987 said:


> Since the lump sum value of my US pension is about $120,000, he says that the tax I would owe on that, after deductions, etc, would be about $18,000 - that's approx only 15%.


That _could_ be true, but that estimate strikes me as too low. Let's start with a brief explanation of how it'd work. That $120K withdrawal would be the final dollars of income in the year you withdraw them -- 2015, presumably. So they'll be taxed at your highest marginal tax rate(s). Your marginal tax rate(s) will be determined based on your worldwide taxable income below that additional $120K, and then the $120K would start from there.

Let's suppose, for example, your worldwide Adjusted Gross Income (AGI) without the withdrawal is $50K. (That'd be roughly $60K of income less an approximately $10K personal exemption and standard deduction, as an example. And maybe your $50K is not U.S. taxed thanks to the Foreign Earned Income Exclusion, but that doesn't matter here.) With $50K AGI, Single filing status, you're well into the 25% tax bracket already. Thus some of that $120K would be taxed at 25% and some at 28%. The actual tax rate across that $120K would be somewhere between 25% and 28%, but it'd certainly be more than 15% in this example. Much more.

So I think your brother might be wrong, but of course it depends on your filing status, your other worldwide income, your exemptions/deductions/credits, whether you have excess Foreign Tax Credits to spend, etc.

I don't think this materially changes post-renunciation except it gets a bit worse (30% withholding). What you can hopefully see is that a paced, multi-year withdrawal, to avoid "spiking" your tax bracket, is the better approach.



> So, may just take it as a lump sum and forget about the IRA, then deposit it in a dollar account here. That is assuming, of course, that the UK does not want a piece of that money as well!!


Not sure, but presumably once you've paid the U.S. income tax the U.K. would grant you a full foreign tax credit on that same income at the very least. The tax treaty might have something to say, too. Same thing with the U.K.: the U.K. has tax brackets, so a _paced_ withdrawal, to stay down in the lower brackets, is more tax-efficient even if the U.K. does want a piece of the action.



> The upside of renunciation is that the 25% tax-free amount of my UK pensions will not be taxed by the US.


OK, let's assume you're correct. Is the U.S. going to tax that pension before you withdraw it? If not, then wouldn't it make better sense to draw down your U.S. 401(k) _more slowly_, as you need the cash, in a more tax-efficient (lower tax brackets) way, _then_ consider renunciation just before you start to draw down your U.K. pension? That at least seems like a _better_ idea than your current plan.

Moreover, I'm not even sure the U.S. would tax that tax-free amount. Remember, the U.S. still gives you a personal exemption and standard deduction. If you're pulling $40K/year out of your U.K. pension (in 2015 dollars), and the U.K. taxes $30K of that, still no problem as far as I can tell. Plus, the U.K. tax rate is probably higher than the U.S. rate anyway, so you'd have a Foreign Tax Credit to play with to offset a bit of U.S. tax.

You can run the numbers, but unless you're going to have a particularly fat pension, that rather small U.K. tax break doesn't seem like a major hurdle over on the U.S. side.


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## BBCWatcher

Following up on my previous post, let's suppose that instead of pulling out $120K all at once we re-run the same example at a pace of $30K per year. Let's just keep the math simple and assume the 401(k) doesn't grow in that 4 year period, though in reality it probably would (and would better in the U.S.), and that's additional benefit.

Let's keep all the other numbers the same and assume a Single filing status again. So instead of $170K in AGI in a single year you've got $50K plus $30K for a total of $80K AGI in each of 4 years. And guess what? Your entire $30K 401(k) withdrawal in this example is now in the 25% tax bracket with none of your withdrawal in the 28% bracket. So you save 3% in tax on a large chunk of that money, plus you give the money more time to grow in the U.S. before taking a "U.K. hit" on the growth. I estimate you'd save roughly $2700 in tax in this example, and that's not counting the value of the additional money growth. That's not a _huge_ amount of money, but I'll take it if you don't want it!


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## JustLurking

BBCWatcher said:


> ...Moreover, I'm not even sure the U.S. would tax that tax-free amount.


It could. This UK tax-free amount falls outside the 'general' treatment of the US/UK tax treaty, and is in scope for the 'saving clause'. So on literal reading the UK pension lump sum is US taxable.

When you start a pension in the UK you can take a full 25% of it up front with no UK tax at all. That could be hundreds of thousands of pounds, all falling in one single year (compare to a UK lottery win, also tax free in the UK except if you're a US citizen). The US annual exemptions and allowances do not come anywhere near that. The FTC will not get close to it either, not least because in this case there is no foreign tax on it. And no FEIE because it is not earned. A large yet avoidable US tax liability on a UK pension lump sum would be an excellent reason for renouncing an unwanted US citizenship. (Others are capital gains on sale of primary residence, US estate and gift taxes, and post-FATCA, in some cases the ability to keep an ordinary bank account open at all.) 

Stretching out IRA withdrawals rather than taking one big chunk is good advice, but in areas connected with the US/UK tax treaty you are off in the weeds.

One example. The treaty explicitly states that only one's country of residence may tax pensions. In this case that is the UK, so a US IRA provider should pay out to an UK NRA with no withholding provided they send the custodian a W-8BEN first. UK taxes are then the responsibility of the recipient.

Another example. The UK also completely respects US Roths, in direct contrast to the US which generally dishes out brutal tax treatment to an ISA, the approximate UK equivalent.

As you are a US citizen living in a country that does not have any tax treaty with the US you will understandably have no visibility on how NRA's experience the US bureaucracy. But if you don't know how something works, please say so rather than speculating from a position of little information. Tax treaties are both slippery and hard to understand at the best of times. Someone trying their best to dig through the details could very easily be put off a correct course by incorrect details delivered in a confident tone.


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## BBCWatcher

JustLurking said:


> So on literal reading the UK pension lump sum is US taxable.


Well OK, but tax_able_ does not necessarily mean _taxed_. That's my point, and it's an important one.

The United States does not tax all taxable income. You have to run the numbers, but, to reiterate, if your overall income in retirement will be moderate or less, and if your U.K. pension (and other U.K. source income) is on the order of $50K or less (rough estimate), I would predict you'd owe zero or near zero U.S. tax on that U.K. pension.



> When you start a pension in the UK you can take a full 25% of it up front with no UK tax at all.


OK. But would you do that, or would you spread out that U.K. tax benefit? Because if you do that you'd increase your total income for that year, pushing your taxable income into the higher/highest U.K. tax brackets, I presume. That's less tax efficient.



> ....would be an excellent reason for renouncing an unwanted US citizenship. (Others are capital gains on sale of primary residence, US estate and gift taxes....


Certainly not U.S. estate taxes. The U.K. has a lower threshold and the same rate, so it's hard to see how the U.S. estate tax would ever matter.



> and post-FATCA, in some cases the ability to keep an ordinary bank account open at all.)


Come on -- that's hyperbole. Has your bank account been closed?



> One example. The treaty explicitly states that only one's country of residence may tax pensions. In this case that is the UK, so a US IRA provider should pay out to an UK NRA with no withholding provided they send the custodian a W-8BEN first. UK taxes are then the responsibility of the recipient.


OK, but what has that got to do with spreading out or not spreading out withdrawals? The U.K. still has tax brackets, and tax brackets mean spreading out is more tax-efficient, as I've stated. It doesn't matter which country is doing the taxing -- the same principle applies. As I stated.



> Another example. The UK also completely respects US Roths, in direct contrast to the US which generally dishes out brutal tax treatment to an ISA, the approximate UK equivalent.


Well, OK. So that'd be a great reason to keep Roth 401(k)s and Roth IRAs -- indeed, to accumulate more of them, if possible.

I certainly did not follow the rest of your post. You're a U.S. citizen dealing with the U.S., not a non-resident alien. And why would you presume I'm unfamiliar with NRA interactions with U.S. "bureaucracy"? I'm acutely aware of many such interactions, as it happens. (I won't elaborate beyond that.)


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## BBCWatcher

Let's run a simulation here, leaving the U.S. completely out of the picture. Let's assume the following about your U.K. pension. I don't know _exactly_ how U.K. pensions and that 25% tax break work, but I think you've given me enough information to take a reasonable guess. If the guess is wrong in some way, go ahead and correct it.

Total Value: 100,000 pounds (2015)
Growth Rate Per Year: 5%
Tax Free Allowance: 25% (25,000 pounds in 2015)
Additional U.K. Source Income Per Year (amount over exemption, usually 10K pounds): 20,000 pounds

OK, we'll run two scenarios. In the first scenario, you'll pull out 25,000 pounds tax free, then draw down the rest of the pension. In the second scenario, you'll draw down the pension with 25% of each/every withdrawal tax free. Here we go, starting with scenario 1....

S1 2015: Income 45,000 pounds, U.K. tax 8000 pounds (40% bracket on 20K pounds)(*)
S1 2016: Income 35,750 pounds (assuming 20% balance withdrawal), U.K. tax 7927 (mostly 20% bracket)
S1 2017: Income 33,230 pounds (20% withdrawal), U.K. tax 6919 (mostly 20% bracket again)
Remaining pension balance to this point: 52,920 pounds

Note again I'm leaving out the 10K in free/exempt income in all of these figures.

....OK, you get the idea. Now let's look at Scenario 2....

S2 2015: Income 40,000 pounds, U.K. tax 7627 (mostly 20% bracket)
S2 2016: Income 36,800 pounds, U.K. tax 6667 (almost entirely 20% bracket)
S2 2017: Income 34,112 pounds, U.K. tax 6117 (entirely 20% bracket)
Remaining pension balance to this point: 56,448 pounds

So what's going on? Two things. First, in Scenario 2 you're spreading more of the withdrawals into the lower 20% bracket. So that's lowering your tax bill. Second, in Scenario 2 you're allowing that tax-free money to grow in your pension account, and so the tax benefit grows right along with it. In Scenario 1, when you sunset that tax benefit right away (in Year 1), it's gone.

Let's pause here. If I'm wrong -- if this is not how your account works -- then step in to correct my/our understanding.

If I'm right (or at least mostly right), even exclusively in U.K. tax terms it simply doesn't make financial sense to take that 25% tax benefit entirely up front, in one lump sum. It's quite foolish. So if doing such a thing makes no sense in the U.K., and if you're basing a renunciation decision partly or entirely on the assumption that you would do such a foolish thing, does that make any sense? It doesn't to me. As an analogy, renouncing a non-U.K. citizenship may be very important and required if you're joining MI5. If you're not joining MI5 -- if that's an act you would never take -- does it matter?

Run the numbers and see what you get, but if I'm even half right....

(*) Key assumption here is that the U.K. treats the 25K pounds as tax exempt first (starting at the 20% bracket), not tax exempt last. The math changes if my assumption is incorrect. And I've actually done this in a weird way, sort of "in the middle," since I've treated 10K of income as exempt first, then the pension withdrawal, then the "top up" income. That may not be correct, but I highlight this point so that it can be corrected if necessary.


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## BBCWatcher

I'm also making a key assumption that there are two (and only two) options for that 25% U.K. tax free distribution: up front, in an initial withdrawal, or spread across withdrawals (as 25% of each withdrawal). Things get even more lovely if the U.K. allows you to defer that 25% tax free withdrawal until the final withdrawal(s). In that case (Scenario 3?) you'd then consider whether to renounce U.S. citizenship just before taking the far future U.K. tax free withdrawal(s). In the meantime, that tax free portion of the pension account grows.

This is fairly common tax optimization strategy in many countries, _if allowed_. The U.S. has similar provisions. For example, for those who have both Traditional IRAs and Roth IRAs, it's _generally_ a good idea to draw down the Traditional first to give the Roth the maximum amount of time to grow, thus carrying its tax benefit forward with growth. The IRS even nudges people in this sensible direction by requiring minimum distributions from Traditional IRAs at age 70 1/2 but not from Roth IRAs. (That's not the primary reason for RMDs, but it's a nice side effect.)

Said another way, tax free money that is able to grow to be bigger tax free money is _usually_ the very last money you want to tap -- that's just financially sensible. (Tax bracket effects can modify this general advice to some degree.)


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## Bevdeforges

> . A large yet avoidable US tax liability on a UK pension lump sum would be an excellent reason for renouncing an unwanted US citizenship. (Others are capital gains on sale of primary residence, US estate and gift taxes, and post-FATCA, in some cases the ability to keep an ordinary bank account open at all.)


I'll let the two of you fight out the details, but I would like to take issue with this statement. Renunciation is an important decision that one should make only after evaluating their total situation, not as a knee jerk reaction to one or two events that may be expensive and/or annoying.

There are aspects to consider outside the strict fiscal impact of retaining or dropping your US citizenship. I'm not advocating one way or the other - just that each person has to evaluate how renouncing might affect their particular situation.
Cheers,
Bev


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## BBCWatcher

Bevdeforges said:


> Renunciation is an important decision that one should make only after evaluating their total situation, not as a knee jerk reaction to one or two events that may be expensive and/or annoying.


Amen. Total situation on a future-looking basis, prospectively, I would add. Reactively is not where you want your head to be on that question, because nothing past tense will change. Good point.

I've yet to encounter a government completely incapable of upsetting me at some point, given enough time.  As it happens, to pick an example, I'm not happy with Japan's "the books say we don't have CBT but, surprise, we really do, a bit" gift and estate tax regime. (Long story.) Nobody is tearing up a Japanese passport, though.

I've learned to take such upsets, governmental and otherwise, in stride and keep my eye on the bigger picture. Occasionally that bigger picture requires (or at least requires considering) taking corrective action. But only occasionally.

Now, I perfectly well _understand_ getting pissed off. Consider Roger Ver as an interesting example. In his younger adulthood the U.S. Department of Justice convicted him and threw him in prison for the better part of a year because he stored explosives in his multi-tenant apartment building and sold them on eBay (to buyers who then used them for God-knows-what and stored them God-knows-where). I can certainly _understand_ why he might be upset with the U.S. government's interference in his commercial enterprise, preventing its, er, explosive growth. Who wants to spend guest time in a federal prison? I don't. Unfortunately the U.S. government is wildly successful in continuing to piss Roger off because he's barred from travel to the United States post-renunciation, even to see his family. So in his particular case renunciation didn't prevent his getting even more pissed off at the same government.  Your mileage may vary. 

Keep a cool head, folks -- in this matter, and in most others. Governments aren't like mother-in-laws: it's not personal.


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## engine987

JustLurking,
Thanks for the comments - I see I have opened a can of worms with my various questions between you and BBCWatcher! A quick comment though on your interpretation of the US/UK tax treaty - if you read Article 17 of the most recent iteration of the treaty, it specifically states as noted in this article:
Article 17 contains an important change from the previous U.S.-U.K. treaty. Lump-sum payments from pension plans are subject to taxation in the country from which they are paid. Under the previous treaty, lump-sum payments from U.S. pension plans to U.K. residents, in certain circumstances, could escape taxation in either country because such payments were exempt from tax in the United Kingdom. This paragraph of the Treaty is not exempt from the Saving Clause, with the result that lump-sum payments paid from U.S. pension plans to United States citizens and residents who are residing in the United Kingdom will now be subject to U.S. tax.

Seems crazy to me but who ever said that politicians and other government personnel are sane!!!!


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## engine987

And, I meant to add, tax on regular monthly payments from a US pension are taxable in the country of residence and, in my case, that means the UK.


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## BBCWatcher

Yes, I've got that, Engine987. But I've completely ignored the United States and posed this simple question: why would you ever take a lump sum distribution in the United Kingdom? Is that ever a sensible idea financially, solely in terms of U.K. tax, if you can avoid it?

There are many things you _could_ do, theoretically. You could join MI5 or be elected to Parliament, both of which probably would directly threaten any foreign citizenship(s) you hold. Would you?

That's the point Bev and I are making (I think), and it's a rational one. You look ahead, prospectively, at what is likely to happen. If taking a lump sum distribution from a U.K. pension fund is something everybody in the U.K. shouldn't be doing if they can avoid it, then you probably don't give that scenario much weight (if any) in your calculus.

But if you do get past that, you move on to the next question: are you likely to take a lump sum distribution _tomorrow_? As I implied above, a _prudent_ approach could well be to _time_ a renunciation for maximum benefit. Renunciation means you shift to 30% withholding in the U.S., and that's bad. So one _reasonable_ approach might be to draw down U.S. funds first, then, just before there's a financial benefit (if there is one) with a U.K. withdrawal, renounce (maybe).

The point is you look at the situation, _prospectively_, and each one is unique.


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## JustLurking

BBCWatcher, you appear to have a real problem in accepting correction. You have made yet more sweeping and incorrect assumptions, dangerous ones in my view, so I'll correct those. On others, I'll simply note for future readers that they should do their own research rather than rely on your speculation.



BBCWatcher said:


> Well OK, but tax_able_ does not necessarily mean _taxed_. That's my point, and it's an important one.
> 
> The United States does not tax all taxable income. You have to run the numbers, but, to reiterate, if your overall income in retirement will be moderate or less, and if your U.K. pension (and other U.K. source income) is on the order of $50K or less (rough estimate), I would predict you'd owe zero or near zero U.S. tax on that U.K. pension.


And to reiterate, the 25% UK tax free lump sum you take on _starting_ a pension in the UK is not UK income, but the US looks past that tax advantage and calls it income anyway. Because it falls into an... unfortunate part of the tax treaty, the US can simply unwind this UK tax benefit.

Note that you take it on _starting_. It's called a 'pension commencement lump sum'.



BBCWatcher said:


> OK. But would you do that, or would you spread out that U.K. tax benefit? Because if you do that you'd increase your total income for that year, pushing your taxable income into the higher/highest U.K. tax brackets, I presume. That's less tax efficient.


Again, you're speculating incorrectly.

You don't get pushed into any tax bracket when the initial 25% is tax free. Since you seem to be missing the point repeatedly, I'll note again that the 25% UK tax free lump sum is _UK tax free_. Thus no UK tax inefficiency in taking it early. Because it's UK tax free.

Most people do take it early. It is in fact the only UK tax advantage left to basic rate taxpayers in the UK -- pay in relieved of 20% tax, then take out 25% of balance leaving the remaining 75% open to 20% rate tax when withdrawn, for a total 5% tax advantage. Taking it is more efficient then, than not taking it. One common use is to pay off a mortgage. So much so that special 'mortgage pensions' exist to facilitate this.



BBCWatcher said:


> Certainly not U.S. estate taxes. The U.K. has a lower threshold and the same rate, so it's hard to see how the U.S. estate tax would ever matter.


It's not about the rate but about things like marital exemption. The US estate tax has no unlimited marital exemption for non-US citizen spouses. A well-off US citizen living in the UK and married to a non-US citizen would face no UK inheritance tax on death, but may well face US estate taxes. That's a motivation to drop US citizenship. See Terry Gilliam for real world example. Also, I suspect, Boris Johnson.



BBCWatcher said:


> Come on -- that's hyperbole. Has your bank account been closed?


It hasn't, but I'm not a US citizen. And although there are still many places where US citizens can have bank accounts in the UK, some banks are indeed turning them away.

Last year NS&I (that's the UK's government-run 'national' bank) started turning away US citizens, even those living in the UK. Several mainstream pension and investment providers now explicitly tell US citizens who are nevertheless UK resident and perhaps also UK citizens they may not hold accounts. And if you look at the small print in UK mutual funds you'll very often find a clause that says the fund may not be held by any 'US person'.



BBCWatcher said:


> OK, but what has that got to do with spreading out or not spreading out withdrawals? The U.K. still has tax brackets, and tax brackets mean spreading out is more tax-efficient, as I've stated. It doesn't matter which country is doing the taxing -- the same principle applies. As I stated.


And as I stated, taking the 25% UK tax free lump sum is, if the US doesn't unwind the advantage that is, more tax-efficient than not. Because it is UK tax free. As I stated.



BBCWatcher said:


> Well, OK. So that'd be a great reason to keep Roth 401(k)s and Roth IRAs -- indeed, to accumulate more of them, if possible.


Yes. In fact there are tax-efficient ways to convert an IRA into a Roth IRA which, if played out right and over a long period, avoid most if not all UK _and_ US tax on the balance. It can be a fiddle to arrange, but it's doable.



BBCWatcher said:


> I certainly did not follow the rest of your post. You're a U.S. citizen dealing with the U.S., not a non-resident alien. And why would you presume I'm unfamiliar with NRA interactions with U.S. "bureaucracy"? I'm acutely aware of many such interactions, as it happens. (I won't elaborate beyond that.)


I'm not a US citizen. I never said I was, and again you're speculating. I am an NRA. Moreover, I am an NRA living in the UK and holding both a UK pension and a US 401k. Which is why I know the details here. In fact, these details and a few like them are much of the reason why I am an NRA and not a US citizen (and I won't elaborate beyond that either).


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## BBCWatcher

So, JustLurking, maybe you didn't read on.... I documented all the key assumptions in the scenarios I ran and _invited_ corrections, repeatedly.

Let's try again: Must you take that 25% lump sum up front as an initial withdrawal (a), or does U.K. HMRC allow you to (b) spread that 25% tax benefit across all your withdrawals (so that each withdrawal is treated as 75% taxable 25% non-taxable); and/or (c) defer that 25% non-taxed sum to the last (or last set) of withdrawals?

I would assert that (b) and (c) are more financially sensible, generally, if allowed, than (a) purely as a matter of U.K. taxation, completely ignoring U.S. taxation. And if (b) or (c) (or both) are allowed, as it happens they also reduce or eliminate U.S. tax liability for U.S. citizens versus (a).

Now if (a) is the only option available, OK. That's what I want to know, and that's what I've been asking. If (a) is the only option, then one would need to calculate what the additional U.S. tax is that would be owed on (a). If that's $500, for example, then paying $2350 to save $500, on the surface at least, doesn't make a whole lot of sense. If it's $10,000, as another example, it gets more interesting.

Once one has weighed that factor and many others, prospectively, and the possibility of renunciation seems to make sense, _then_ one moves to timing. As I mentioned, an immediate renunciation with U.S. assets results in immediate 30% withholding in the U.S. That's unambiguously bad. So a _reasonable_, optimal strategy in the circumstances might be to draw down the U.S. account first, as a U.S. citizen, then renounce (or consider renouncing) just before collecting the U.K. windfall.

And I'd refer to you to the point Bev made as well, which I agree with.

With respect to the NRA spouse and the estate tax, yes indeed, the $5.43 million (2015) exemption applies when a U.S. citizen spouse passes an estate to an NRA spouse. If the U.S. citizen's spouse has an estate materially more valuable than that figure, of course it's prudent to take a look at options. Unfortunately most of us don't have that particular problem, and unfortunately I don't even know anybody that has that particular problem. I guess we're all poorer than you are. 

Interestingly one effective and very popular remedy for that particular problem, if it exists, is that the NRA spouse acquires U.S. citizenship. That requires residing (or "residing") in the U.S., of course, but it's a well known tax strategy that's commonly practiced among the wealthy with that particular happy problem. Lifetime gifts of $143K (I think that's the right figure) per year to the NRA spouse are also permitted without any U.S. tax consequence. Most mere mortals consider that to be a lot of money.

Japan, by the way, is down at 1.1 million yen per year for 5 years after Japanese residence -- what you might call "mild CBT hangover." Did I mention Japan?  Fewer mere mortals would consider that to be a lot of money.


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## JustLurking

BBCWatcher said:


> ... As I mentioned, an immediate renunciation with U.S. assets results in immediate 30% withholding in the U.S.


No, it doesn't. Renouncing makes one an NRA. An NRA in the UK files a W-8BEN with the IRA or 401k provider. The provider then applies the US/UK tax treaty withholding rate. On pensions, that withholding rate is 0%.

BBCWatcher, it seems that posting here is your day job. However, it isn't mine, so I'll sign off here and go back to lurking. I just didn't want the large quantity of potential misinformation upthread to go unchallenged.


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## BBCWatcher

Sigh. There's a _general_ withholding rate of 30% on U.S. assets for NRAs. (Forgive me for not including the word "generally" in one spot. Point taken.) If you're one of the few lucky ones to enjoy a preferential treaty rate on particular U.S. assets (and hopefully those are your only assets), fantastic, wonderful, excellent.

You're just making my point for me, that every situation is unique and requires careful analysis.


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## JustLurking

And you continue to make my point for me.

The OP is _trying_ to uncover their unique situation, and you keep on confusing those attempts by posting the "general" information that doesn't apply to their unique case.


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## JustLurking

Okay, one last comment before I'm really back to just lurking...

OP writes upthread: "_As an update, I have visited the US embassy in London and renounced my citizenship. From what I understand, it will only become official when I get some certificate from the state department._"

Depending on what that visit entailed, the OP is very likely _already_ a non-US citizen. In which case none of the baroque arrangements proposed upthread for US citizens to try to mitigate US tax loss on UK pension lump sums is relevant.

Some US embassies insist on two visits to renounce, but London (UK) requires only one. At that visit you hand over your signed DS-4079, swear the oath, fork over the (execrable) $2,350 fee, and from that point on you are no longer a citizen. The DOS may take months or -- in some cases -- more than a year to send your CLN, but this is just admin. Assuming OP did this and didn't just wander in to the embassy for a chat, the deed is done.

The official date of US citizenship renunciation is the earliest of one of four dates. The applicable one here is, from the form 8854 instructions: "_The date you renounced your U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality)._"

The date of renunciation printed on the CLN will be the date of embassy visit. What are the chances that the US refuses to issue a CLN in a straightforward renunciation case such as this? They _could_, but they never have -- what would be the point?


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