Transferring a UK pension to the US

Hello.  My husband just started a new job and finally managed to track down some info about the possibilities for transferring a UK pension to the US should we move back.  He thought I should share what he found:

"From: Pension Schemes Helpdesk pensionschemes@hmrc.gov.uk
Sent: 11 October 2007 10:22

A transfer can only be made to an overseas scheme if that scheme has been accepted by HMRC as a 'Qualifying Recognised Overseas Pension Scheme' (QROPS).  A list of QROPS can be found at www.hmrc.gov.uk/pensionschemes/qrops.pdf.

An overseas pension scheme manager can apply for QROPS status by submitting form APSS251.  The form, together with notes on its completion, can be found at www.hmrc.gov.uk/pensionschemes/overseas.htm.

Once an overseas scheme has been accepted as a QROPS, the actual transfer is a matter between the two schemes involved.  A transfer to a QROPS is an authorised payment.  As such, there is no UK tax charge on the transfer payment.

However, I feel I should warn you that some issues have arisen when people have tried to transfer their funds into US schemes.  The US IRS has stated that US Qualified scheme cannot accept transfer payments from non-US schemes.

You should check that the potential receiving scheme is in fact able to receive transfers from UK schemes and where the transfer does take place, you may wish to consider taking advice on any potential US tax consequences as a result of the transfer.

I hope this is useful.

Yours sincerely

Clare Bradbury (Miss)
Pension Schemes Services Website:
www.hmrc.gov.uk/pensionschemes

Helpline:
Great Britain: 0115 9741600

If you are phoning from outside Great Britain ++44 115 9741600 Opening hours Monday to Friday 9.00 to 17.00"

None of the approved pension schemes in their list are applicable to our fields, so it looks like we would not be able to transfer our UK pensions to the US, or at least not without a lot of hassle.  Although this information just confirms what we suspected all along, naturally we are not pleased.  My husband has been working in the UK for 4 years so far, and we have had to opt out of pension contributions during this time.  Sure, we just get the money that he would have contributed up front, but it the employer contributions that are a real loss.  My husband's employer pays 16% of his salary into the pension scheme-- that's a lot of money that should be ours!

Not sure if there is any way to work on remedying this problem...  For countries with such a "special relationship," there are so many ways in which their governments do not play nice!

Anyway, I hope this information is helpful.

You are correct; you cannot transfer a non-US qualified plan into a US qualified plan.  The problem is all at the US side of the ocean.  However the good news is that when your husband draws a pension you will have tax-free basis in the plan to the extent of the employers contributions that you will have recorded each year on your US tax returns and your husband's own contributions.  (I am assuming here that husband is a US citizen).

Consequently a good chunk of each pension payment will turn out to be tax free in the States.

You are correct; you cannot transfer a non-US qualified plan into a US qualified plan.  The problem is all at the US side of the ocean.  However the good news is that when your husband draws a pension you will have tax-free basis in the plan to the extent of the employers contributions that you will have recorded each year on your US tax returns and your husband's own contributions.  (I am assuming here that husband is a US citizen).

Consequently a good chunk of each pension payment will turn out to be tax free in the States.

Not sure I understand the OP's question.

The OP's husband has opted out of the UK pension scheme, I imagine because of the potential difficulty in dealing with it if they return to the US so there is no UK pension and they are down the 16% UK employer contribution. So the question seems a bit academic.

Here is a depressing article that underlines Guya's answer that the IRS taxes all contributions to foreign pensions.

http://www.iht.com/articles/2002/05/25/rpension_ed3_.php?page=2

However, I was under the impression that the UK/US tax treaty allowed a US citizen living in the UK to deduct contributions made to UK pensions. So now I'm confused. 

No question-- just sharing some answers we found.

One can deduct contributions under the treaty on US returns only if the employee fits squarely within Article 18(5) of the treaty and if appropriate treaty disclosure is made with each US return.  This would normally result in zero tax difference so not claiming treaty benefits is often the better answer.

This is a highly complex area of the law so it is just not possible to answer every possible circumstance in a brief forum such as this...

One can deduct contributions under the treaty on US returns only if the employee fits squarely within Article 18(5) of the treaty and if appropriate treaty disclosure is made with each US return.  This would normally result in zero tax difference so not claiming treaty benefits is often the better answer.

Surely not a "zero tax difference". Isn't it better to defer paying the tax until you retire when you will probably be in a lower tax bracket? Also the money you would have paid to the IRS can be invested.

The current tax difference on claiming treaty relief is usually zero because whether one reports greater or lower taxable income on a current US return the US tax is -mostly - zero after credit for UK taxes.   

The current tax difference on claiming treaty relief is usually zero because whether one reports greater or lower taxable income on a current US return the US tax is -mostly - zero after credit for UK taxes.   

But the UK pension investments would be UK tax deferred so there would be no credit for UK taxes on that money until you took it as income. Also the current tax isn't really the point with pensions, its the difference between your tax bracket when you defer the tax and when you take the income

MasterBlaster,

US taxation of UK pension contributions and UK pension withdrawals. 

Guya's telling you that you have two choices.  He's using technical language.  I'll simplify.

1)  Tax Now.  At 0% (since you have excess foreign tax credits to offset the additional income).  Later, when you withdraw the pension, the contributions are tax-free because you've ALREADY paid tax, albiet at the rate of 0%.  Net result:  25% tax free in UK, some humungous percent is also tax-free in US - YOU WIN.

2)  Postpone tax.  Like above, you pay 0 tax now, but for an entirely different reason - you claimed the treaty benefit to shelter the income transfered into the pension fund from US tax.  Later, when you withdraw the pension, the entire shmangadoodle is taxed, at 15%+, because you HAVEN'T paid tax on it in advance.  Net result:  Your 25% UK tax-free amounts to diddlysquat, because you end up paying FULL US TAX on ENTIRE pension - YOU LOSE.

Is that a bit clearer?

IRS Circular 230 Disclosure:  To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.

Oh, and sorry if that last post sounds a bit abrupt or terse.  It's hard to write these things sometimes!  I mean everything I post in the best of spirits; all I want is for people to get the best solution to their problems.

Just to clarify... All of this discussion about tax is not actually relevant to to the issue of transferring your UK pension to a US pension scheme so much as receiving a UK pension itself while living in the US, right?  Or would you be taxed the same way whether you transferred your UK pension to the US or received your UK pension in the US?

Hopefully this tax info will be helpful to someone, but it makes no difference to me personally either way, as my husband is not a US citizen and has opted out of the UK pension scheme, so we will not be dealing with this whole pension tax mess-- although we are paying a price to avoid the hassle.  I can only hope that we return to the US soon so we can enroll in a pension scheme there.  We first thought we would only be here a year, so no point in enrolling in the UK pension scheme, then only 2 years more-- still no point, because if you leave the scheme after 2 years or less you only get refunded your own contributions (nothing the employer put in)-- but now he's on his third contract, and I'm still hoping to leave in another year or two, but you never know what the future holds...

Great point!

However you cannot transfer a UK registered pension to a US qualified plan because a UK plan is not US qualified so it would disqualify the entire US plan that accepted the money.

So this is a real issue, brilliantly explained by Lizzit previously.

Just to clarify... All of this discussion about tax is not actually relevant to to the issue of transferring your UK pension to a US pension scheme so much as receiving a UK pension itself while living in the US, right?  Or would you be taxed the same way whether you transferred your UK pension to the US or received your UK pension in the US?..

I'm sorry to have hijacked the thread. I think your situation is one many expats run into and in my opinion its always good to get into a pension scheme just to get the company match, assuming its a define contribution plan. That's free money and its worth the possible tax hassles. Also I think its best to leave pensions, 401ks, IRAs etc alone, don't try to move them to different countries, even if it is possible. I have an IRA in the States and it will be there until I'm 59.5, then I'll deal with the cross border income tax issues. In the case of UK to the US transfers  I'd be wary of the QROPS thing as many of the plans seem to be company 401k plans. I wonder if its a special thing for highly paid execs.

Lizzit, thanks again for your comments they illuminate some aspects of the taxation of pensions that I was not aware of in relation to Guya's informed, but slightly opaque comments. Its best to be terse in comments to get the point across and thanks for introducing me to the tax term "shmangadoodle". Just a quick couple of questions.

1) When you "pay" tax on the pension contributions to the IRS do you take a credit for the UK income tax you've paid rather than using the foreign earned income exclusion? Then when you take income its basically US tax free (not sure how they'd deal with tax on the gains) and you get your 25% lump sum tax free in the UK and pay UK income tax on the rest.

2) If you go the other route and shelter the contributions from the IRS, wouldn't the 25% UK tax free sum also be tax free in the US because of the treaty and would you then be able to take tax credits on the income (avoiding double taxation) and end up in a similar situation to option 1.

I know you'll tell me that I'm mistaken, but I hope that my ponderings will help other posters with similar questions.

>1) When you pay tax on the pension contributions to the
>IRS do you then take a foreign tax credit for that on the
>UK tax return? resulting in zero net tax or do you do
>something on the US tax return to give you zero net tax?

It's on the US return; you claim the income, and you then take a foreign tax credit on the US return for all the UK foreign taxes paid.  All lumped together in the basket of General Limitation on Form 1116.  Nothing is done on the UK return.  There's a further caveat, which is that if you put too much into the UK plan, you WILL end up paying US tax.  Normal-sized contributions shouldn't trigger US tax.  Humongous contributions allowed under the UK laws, ones the size of £200,000+, usually would.

>Do you have to itemize the foreign tax on the US return
>rather than just taking the Foreign Earned Income Exclusion.

You can use either for your contributions.  For your employer's contributions, you can only use FTC (Form 1116).

>2) If you go the other route and shelter the contributions
>from the IRS, wouldn't the 25% UK tax free sum also be tax
>free in the US because of the treaty

No. 

>and would you then be able to take tax credits on the income
>(avoiding double taxation) and end up in a similar situation to option 1.

Not precisely.  (a) You might not have enough tax credits.  And tax credits run out after 10 years; you might spend 20 or 30 in retirement.  (b) Even if you do have enough credits, the greater income would put more of your income in the higher tax brackets.  This means the US income would be taxed at a higher rate than if the income was exempt on page 1 due to being previously taxed. 

Net result:  It's more tax efficient to tax now at 0% than take a chance all the dice will roll your way some umpteen years from now.

Wow Lizzit thanks. You have a lot of patience for the foolish armed with incomplete understanding like me.