This post is primarily for those close to retirement, or retiring, in the UK. It may not be of interest to most members of UKY.
It is possible a few USC’s, working (and retiring) in the UK may be facing an option to retire from employers forced to reduce large staff numbers. They may be concerned about the financial realities of retirement. Their US citizenship puts them in a unique position in relation to the normal UK and US retiree. Books on retirement finances invariably concentrate on strategies for one country only, with no consideration of taxes, options, or regulations of another.
Seeking advice and making decisions on pensions can be confusing, along with the many tax implications. No one on a public forum can sensibly comment on another person’s pension situation. The intention therefore is to offer those not yet retired some insight into the considerations made, and the outcomes experienced, by others. The following are experiences of a USC retired from the UK private sector. I can’t comment on UK public sector retirement, so hopefully someone will relate experiences there.
I took early retirement 5 years ago. A long time resident in the UK/Europe, I never considered US retirement vehicles (Roth, 40whatever, etc.). Due to US tax implications, I chose not to take the normal UK tax free lump sum distribution from my UK occupational pension. The US implications were compounded by an early retirement redundancy payment, a portion of which was also tax free in the UK.
I receive various occupational (final salary) and State pensions, along with asset income. I avoid stocks/shares. For me, the US capital gains tax based on exchange rate variances, in addition to the ups and downs of the market, create an overly complicated environment should I need to sell. I once barely escaped paying US capital gains tax when liquidating a UK shares ISA that had a 25% loss on it. Due to US taxes (Schedule D), exchange rates may influence the choice to sell the house, if it were an option.
At the point of retirement, be aware of US tax brackets and thresholds. Exchange rates can play a large part. After retirement, US tax reporting can be complicated. It’s my understanding that the IRS allows a reduction for your contributions to pension and annuity schemes (within rules). If you choose NOT to invoke the treaty, the IRS will allow a 15% reduction (married filing separately), or more (married filing jointly), on US Social Security payments (within rules). Both are calculated prior to AGI. There are no such opportunities for reductions in the UK. Instead, if your income is below £24,000 (2011/12), you receive a larger personal allowance. The tax implications at the point of retirement in the UK are usually related to 20/40/50% tax bands, but long term tax planning is essential prior to retirement. If you collect more than £28,930 (2011/12, from all taxable sources) a year, you pay exactly the same taxes as someone working with the same income. It’s my understanding HMRC only tax 90% of income remitted to the UK from many foreign pensions (within residence and domicile rules).
The base amount paid out from a pension is fixed (but many are index linked) for the remainder of your life. After you’ve taken a pension, you can’t quit and find another paying more. You find many calculators that project the funds required at retirement. If you won’t achieve that figure, then the most frequently asked yet unanswered questions are “Can I afford to retire?” and “How long will the funds last?”
I strongly believe it is impossible to accurately predict retirement finances further ahead than the next 30 seconds, but just in case….. I created a spreadsheet projecting my situation at the point of retirement forward for 30 years (a commonly used practice). I compared differing 30 year scenarios by altering the value of ‘variables’ for each scenario. I settled on the following variables: occupational pensions (2% yearly increase), investments (4% return yearly), Old Age pensions (1% yearly increase), and a yearly inflation rate of 7.5% for both essential and discretionary spending. (Discretionary spending remains an important variable). CPI increases on pensions are insignificant when faced with rising inflation. I tried to overcompensate, but future years may prove 7.5% inadequate. Analysis over the last 5 years shows a 4.8% true yearly average inflation rate on my essential spending such as council tax, insurance, utilities, etc., in spite of a 5 year UK average CPI of 2.7%. I also calculate the tax situation throughout. Please understand that performing any such calculations can only result in a guess and not reliable figures, particularly for the later years of retirement.
Final salary pensions are a saving grace. It’s unfortunate many no longer have access to them. The 5 years of retirement have been financially comfortable, but inflation will always reverse the situation, given enough time, no matter how large anyone’s pension pot.
I thought this might encourage others to share their planning or retirement experiences, creating an awareness of what needs to be considered for those not yet retired, particularly those with other types of plans (defined contribution, annuities, etc.). Again, this post may be of most interest to those contemplating retirement in the UK in the near future.
As always, I am neither a professional financial nor tax advisor. Opinions expressed, or actions I have taken, may well be incorrect.
