# UK Pensions: 25% Lump Sum tax-free



## underation (Oct 25, 2018)

When I retired, I began to receive monthly payments from my Defined-Benefit pension. I also received 25% of the pension as a lump sum, free of tax.

Article 17 of the US-UK double tax treaty (https://assets.publishing.service.g...a/file/507431/usa-consolidated_-_in_force.pdf) says in paragraphs 1 and 2:



> 1) 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.


Paragraph 17(1) is protected from the saving clause, but paragraph 17(2) is not - therefore in theory the IRS could choose to assess US tax on the 25% UK-tax-free lump sum. This is pretty upsetting, for a UK-resident who has earned their UK-source lump sum fair and square and is fully entitled to enjoy it without being nagged at by US tax advisers or US tax software trying to make them hand over US tax on the sum.

It appears to me that there is a (legal and correct) solution to this, which is to exclude the lump sum from taxable income on the grounds that it is exempt by treaty.

The instructions for Form 8833 tell you that reporting is waived for the treaty-based return position “That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal services, pensions, annuities, social security, and other public pensions, as well as income derived by artists, athletes, students, trainees, or teachers.”

That’s what I would do, if I were a US-tax-return-filing UK-resident US citizen about to receive a lovely tax-free lump sum from a UK DB pension.


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## Bevdeforges (Nov 16, 2007)

And that's what they used to teach us at one of the big public accounting firms (when I did my rotation through the tax department): taking an assertive position. Or as the folks at Nike would say: "Just do it."

If the IRS should ever come back with questions (highly unlikely) you just explain your position - and unless there are vast sums involved, chances are that'll be the end of it.


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## underation (Oct 25, 2018)

“Assertive” is a good word for it, IMO.

By not reporting one’s non-US-taxable as US-taxable, one asserts one’s right to the status of “innocent unless proven guilty.”

The burden of proof thus remains where it belongs - with the IRS.


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## Cousin Jack (Feb 6, 2016)

underation said:


> When I retired, I began to receive monthly payments from my Defined-Benefit pension. I also received 25% of the pension as a lump sum, free of tax.
> 
> Article 17 of the US-UK double tax treaty (https://assets.publishing.service.g...a/file/507431/usa-consolidated_-_in_force.pdf) says in paragraphs 1 and 2:
> 
> ...


Thanks for that. I just posted a question concerning my pending pension commutation and it seems you may have provided an answer.


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## Nononymous (Jul 12, 2011)

The general approach to take here is to not tell the IRS anything it doesn't need to know. Take the position that the lump-sum is not taxable, and therefore need not be reported. If the IRS had a problem with that - which they won't because they won't know about the payout - then you can have a discussion. But until then, do not volunteer information.

I assume you have US assets and/or income after your time there? Otherwise why file at all?


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## Bevdeforges (Nov 16, 2007)

I'm very much inclined to agree with Nononymous here. I actually did do a quick search to see what the treaty says you're supposed to do. The IRS site is utterly useless in this regard and just points you to "the treaty" without any sort of explanation.

The remaining sources are all tax "advisers" looking to sell you their services. The first one cites some fairly convincing sounding material proving all the sources that say that these 25% lump sum payouts are free of US tax are WRONG. Then you get all the sources that contend that the payout is not taxable in the US, but only if you file that form 8833. (Which they will do for you for their usual "reasonable fee.")

OTOH, foreign pensions aren't reported to the IRS so they really don't have any way to know that you were paid out in a lump sum. And you can "just assume" from what you've read "somewhere" that it is not taxable the same way it is in the UK.


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## Cousin Jack (Feb 6, 2016)

Thanks very much.

Apart from a small amount of savings in a US bank (kept to pay the IRS on any tax owed!) I do not have any assets in the US.
I agree and take the opinion that it is not taxable and no need to report.


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## Nononymous (Jul 12, 2011)

Cousin Jack said:


> Thanks very much.
> 
> Apart from a small amount of savings in a US bank (kept to pay the IRS on any tax owed!) I do not have any assets in the US.
> I agree and take the opinion that it is not taxable and no need to report.


The less reported to the IRS the better, is a good rule to live by.


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