# Avoiding double taxation on pensions UK & US



## iota2014 (Jul 30, 2015)

Bevdeforges said:


> OK - just goes to show how you have to think through the implications of each situation. Though in the OPs case, since she moved to the UK at age 20, having never held a job in the US, chances are she can skip any consideration of US SS benefits.
> Cheers,
> Bev



To me it seems the opposite is true. SS benefits weren't a factor in my decision to renounce - just a lucky consequence, in that I would never have known I might be able to claim, if I hadn't stumbled across it while researching renunciation. 

SS benefits might well be worth considering, for a younger expat US citizen deciding whether/when to renounce. If the OP and her spouse were to decide to go back to the US to work at some point (thus building up SS benefits for each), they would need the OP's US citizenship, and might therefore want to decide against renunciation or postpone it to a later date. 

A lot of US/UK dual couples go for working long enough in each country to build up pension entitlement, thus making use of the treaty provision (17.3) which makes SS-type pensions taxable only in the country of residence. Whichever country they choose to retire in, they end up with four pensions, paying no or low tax in the country of residence and no tax in the other country.

Uncertain times for such longterm planning, though. Who knows what might change, post-Trump/Brexit.


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## JustLurking (Mar 25, 2015)

iota2014 said:


> ... 90% is taxable by HMRC.


It looks like the UK govt now intends to eliminate this 10% tax-free portion. Sigh.


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## iota2014 (Jul 30, 2015)

JustLurking said:


> It looks like the UK govt now intends to eliminate this 10% tax-free portion. Sigh.



Sigh indeed. 

Thanks for the headsup.


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## Bevdeforges (Nov 16, 2007)

Actually, not all the tax treaties are like the US-UK one. Most, in fact, say that "government" pensions (including US SS and IRA withdrawals, etc) are only taxable by the state that is paying the pension. Now, it's possible not to pay any income tax on your SS benefits, but if you're filing married, filing separately, 85% of the benefit paid is taxable. And if you're a non-citizen when you start taking your benefits, you may well be subject to the 30% withholding, depending on where you are living at the time.

So, it matters what country you are likely to wind up in, not necessarily where you live at the moment, too. Another reason for holding off on the decision to renounce as long as possible.

However, the key thing for our OP here is to work out her 2015 tax returns to make sure she owes nothing. Then she can decide whether or not to back file, or to go the Streamlined route or how to proceed going forward.
Cheers,
Bev


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## iota2014 (Jul 30, 2015)

Bevdeforges said:


> Actually, not all the tax treaties are like the US-UK one. Most, in fact, say that "government" pensions (including US SS and IRA withdrawals, etc) are only taxable by the state that is paying the pension.


I don't know about other treaties, but in the US/UK treaty neither SS pensions or IRA pensions count as government pensions. In the US/UK treaty, SS pensions and the UK State pension are dealt with in Article 17.3. Government pensions (roughly, pensions paid by a government (or local authority) for services rendered to that government (or local authority)) are dealt with in Article 19.



> Now, it's possible not to pay any income tax on your SS benefits, but if you're filing married, filing separately, 85% of the benefit paid is taxable. And if you're a non-citizen when you start taking your benefits, you may well be subject to the 30% withholding, depending on where you are living at the time.


Always essential to study the treaty that applies in one's country of residence, I agree.



> ... the key thing for our OP here is to work out her 2015 tax returns to make sure she owes nothing. Then she can decide whether or not to back file, or to go the Streamlined route or how to proceed going forward.


I would say the key thing is to be aware of the options (comply, renounce, ignore), and be aware of the various pros and cons, before taking action.


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## iota2014 (Jul 30, 2015)

iota2014 said:


> Sigh indeed.
> 
> Thanks for the headsup.


Consolation: if taxing of foreign pensions is to be brought into line with taxing of domestic pensions, presumably the software will be able to cope with foreign pensions. Goodbye Foreign Notes... 

I wouldn't be surprised if that's what gave them the idea.


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## JustLurking (Mar 25, 2015)

iota2014 said:


> Consolation: if taxing of foreign pensions is to be brought into line with taxing of domestic pensions, ...


If foreign pensions are to be *truly* brought into line with domestic ones, that would suggest an _increase_ to a 25% tax free 'lump sum' rather than the current -- and perhaps on borrowed time -- 10% exclusion.

Yeah, right.

Call me cynical by all means, but somehow I cannot bring myself to believe that bringing these "into line" will result in anything other than yet another tax rise for a voting bloc that is too small to have any effective representation.

Dropping paperwork is no consolation. It might however be worth working out at what point taking an _entire_ US pension as a lump sum in the UK, if possible, becomes worthwhile. Under the US/UK treaty, regular distributions are taxable only to the UK, but "lump sums" are taxable only to the US. If the new president gets his way, US tax rates might head downwards to the point where drawing the whole pension in one go at US tax rates beats drawing it piecemeal at UK tax rates.

For what it's worth, I have emailed my MP to request urgent clarification on this proposal (details, protections?). For some folks it could equate to a 10% increase in UK tax. On _pensioners_, no less. I would call that unacceptable.

Sorry for hijacking the thread, by the way.


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## Bevdeforges (Nov 16, 2007)

US Social Security is not available to take as a lump sum. So that scotches that idea.

And the "self-saving" type of pension (IRA, 401K, etc.) is taxed at normal income tax rates in the US if you withdraw the whole thing (or any part of it) as a lump sum. Not normally considered an economically viable way to do things.
Cheers,
Bev


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## iota2014 (Jul 30, 2015)

JustLurking said:


> Dropping paperwork is no consolation. It might however be worth working out at what point taking an _entire_ US pension as a lump sum in the UK, if possible, becomes worthwhile. Under the US/UK treaty, regular distributions are taxable only to the UK, but "lump sums" are taxable only to the US. If the new president gets his way, US tax rates might head downwards to the point where drawing the whole pension in one go at US tax rates beats drawing it piecemeal at UK tax rates.


Isn't there a Lifetime Allowance for foreign pension lump sum payments?


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## JustLurking (Mar 25, 2015)

Bevdeforges said:


> US Social Security is not available to take as a lump sum. So that scotches that idea.


Yup. It could only work for defined contribution pensions (IRA, 401k, etc).



Bevdeforges said:


> And the "self-saving" type of pension (IRA, 401K, etc.) is taxed at normal income tax rates in the US if you withdraw the whole thing (or any part of it) as a lump sum. Not normally considered an economically viable way to do things.


Not normally. But odd tax treaty rules, not to mention unstable tax regimes, sometimes make the abnormal a rational response to an irrational system.

I expect to be in the UK 40% tax bracket on all my pension withdrawals. With a 10% tax exemption this makes my UK rate 36%, and below the top 39.6% US rate. Without the exemption my UK rate would exceed the current top US rate. Not a huge difference, but I'd also get the added (and considerable) benefit of some of this income falling into lower US brackets. The maths on this might tip the balance towards taking a full distribution in one go, then. Best of all might be a one-off conversion into a Roth IRA. It's certainly worth me running the numbers once the details are known.



iota2014 said:


> Isn't there a Lifetime Allowance for foreign pension lump sum payments?


Not as far as I know. There is an 'International Enhanced Lifetime Allowance' that you can get for _UK schemes_ where you remained a member while working outside the UK, but it's not relevant to _US schemes_, all of which -- provided their contributions are not "UK tax-relieved" -- fall entirely outside the whole UK pensions 'lifetime allowance' mess anyway.


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## iota2014 (Jul 30, 2015)

> There is an 'International Enhanced Lifetime Allowance' that you can get for UK schemes where you remained a member while working outside the UK, but it's not relevant to US schemes, all of which -- provided their contributions are not "UK tax-relieved" -- fall entirely outside the whole UK pensions 'lifetime allowance' mess anyway.


Maybe. The UK has primary taxing rights on distributions to UK residents, and only concedes to the US on "lump sums" in order to avoid "double non-taxation". The meaning of "lump sum" isn't defined in the treaty. I can't quite see why the UK would agree to forego its primary taxing rights on the distribution of 100% of a foreign pension. But who knows? Not I.

Be interested to hear HMRC's answer, if you go down this road.


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## Bevdeforges (Nov 16, 2007)

Have moved this discussion of pensions into a thread of its own to avoid overwhelming those interested in the original topic of the thread.

Carry on....
Cheers,
Bev


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