Pensions

If the pension payments were periodic..........any UK tax free amount.......

And therein may lie the problem for Alan. Do the pensions offer the ability to have periodic payments with a tax free amount allowed for each equal periodic payment? Most UK pension plans do not. It's usually a one off - select the 25% tax free lump sum option at the commencement of the distributions.

I would be interested to know if there are any UK pension plans that do allow a continuous, over the life of the pension, 25% tax free to be allowed on each and every normal periodic distribution during the pension life. Perhaps possible if the pension has a set life, say X amount for 15 years and then the pension ends?

Think of a defined benefit pension with rights of survivor. How is the 'tax free' amount determined on each periodic payment over the life of the pension?

If the tax free amount is used to buy an annuity rather than crystallizing it as cash then that would presumably have both a UK and US tax free basis. Also as you can now do drawdown you can spread the tax free amount withdrawal over a number of years and that could qualify as periodic income which would be tax free in both the UK and the US......I would talk to the UK administrator.

If the tax free amount is used to buy an annuity rather than crystallizing it as cash then that would presumably have both a UK and US tax free basis.

Not as convincing as the second option below. It appears a 25% lump sum is still involved. Limited to defined contribution pensions.

https://www.pensionwise.gov.uk/mix-options

Also as you can now do drawdown you can spread the tax free amount withdrawal over a number of years and that could qualify as periodic income which would be tax free in both the UK and the US......I would talk to the UK administrator.

Pensioner determines both the amount of drawdown and the time of drawdown. Limited to defined contribution pensions. HMRC approved method. The only question is: are the individual, pensioner determined drawdowns mini-lump sums? Of the two, this might be worth a punt. Interesting, they could be regulated to be 'periodic'.

https://www.pensionwise.gov.uk/take-cash-in-chunks

Pensioner determines both the amount of drawdown and the time of drawdown. Limited to defined contribution pensions. HMRC approved method. The only question is: are the individual, pensioner determined drawdowns mini-lump sums? Of the two, this might be worth a punt. Interesting, they could be regulated to be 'periodic'.

https://www.pensionwise.gov.uk/take-cash-in-chunks

One of my defined contribution plans is with Scottish Widows (SW).  Its Flexible Access options are detailed at:
http://www.scottishwidows.co.uk/retirement/retirement-explained/taking/pension-options/flexible-access/#collapseTwo

Option 1, Flexible Drawdown:
25% tax-free lump sum, the rest received as taxable income.

Option 2, Partial Pension Encashment (PPE):
Anytime withdrawals with 25% being tax-free and the rest subject to tax.

I phoned SW for clarification about Option 2.  It said that the minimum for any withdrawal is £5,000 and withdrawals can be made at most once per month.  Automatic, periodic withdrawals cannot be organised; each withdrawal must be requested separately.

At £5,000 a pop, this particular pension pot of mine could take not more than five withdrawals.  Withdrawals over five months would probably look like five lump sum payments.  Withdrawals of once a year for five years would look more periodic, but I would need to organise each withdrawal myself.  Manually doing the annual withdrawals is not a problem but, as theOAP points out, would these be regarded a mini-lump sums or seen as periodic?

It's interesting that the Pension Wise site to which theOAP refers (https://www.pensionwise.gov.uk/take-cash-in-chunks) says that "Your 25% tax-free amount isn’t paid in one lump sum – you get it over time." and refers to them as "chunks".  That said, the SW website still describes them as lump sums.

SW did say that other providers may offer automatic, periodic withdrawals incorporating the 25% tax-free amount, but it didn't know.  SW also suggested asking Pension Wise for guidance.

I plan to phone my other plan providers to see what they say.

While I have forgotten at this stage of the thread what the question is, taking payments of 5 separate payments would not - according to HMRCs view - be considered a lump sum. Therefore, it would be 5 periodic payments. 

While I have forgotten at this stage of the thread what the question is, taking payments of 5 separate payments would not - according to HMRCs view - be considered a lump sum. Therefore, it would be 5 periodic payments.

The question, at present, is how would the IRS regard it?  Lump sum or periodic payments?

Edit:  Or more to the point, would such £5,000 payments taken once a year for five years (or even £2,500 taken once a year for ten years) be regarded as squarely falling in under 17.1 and hence benefiting from taxation only in the UK (including 25% tax-free portion) and no portion being taxable in the USA?

If it is a complete distribution of a plan it is a lump-sum. Anything else is not a lump-sum.

Out of curiosity, I had looked at the 3 companies you listed in your first post, concentrating on UFPLS. The SW site seems adamant that any of its products will have the £5,000 minimum.

http://www.scottishwidows.co.uk/existingcustomers/individualpensions/personal_pensions/pension_encashments.html

I noted also this:
"Taking pension encashments will reduce the value of your plan."

Aviva have a description of UFPLS offerings, but without much detail as to any restrictions, but did note the new MPAA limits if you continue to contribute.

http://www.aviva.co.uk/retirement/using-pension-money/take-money-whenever-you-need-to/

Legal and General say little about UFPLS, but does note also that drawdowns have a minimum of £5,000, and two a year are the maximum number of drawdowns.

http://www.legalandgeneral.com/library/pensions/product-information/ppp_product_summary_post_rdr.pdf

(page 5/10)

I asked my other pension providers (Aviva, Friends Life, Legal & General) about the partial pension drawdowns.  In each case, 25% of any single drawdown would be tax free while the rest is taxable income.  In no case could the drawdowns be arranged to occur automatically; each drawdown needs to be arranged manually.  (The reason offered by L&G for the inability to arrange automatic drawdowns is that government pension rules could change.)

Where providers differ is the minimum withdrawal amount and the maximum number of withdrawals per year.  To summarise, including Scottish Widdows:

                                   Minimum         Maximum
Provider                    withdrawal       withdrawals/year
Scottish Widdows         £5,000               12 (1/month)
Aviva                             None                 No limit
Friends Life                   None                 6
Legal & General           £5,000                2

Aviva and Friends Life have the most liberal withdrawal policies, but I bet they amend theirs over time to be more limited.

Anywho, back on topic, taking a single payment of the same amount per year from a plan(s) is clearly possible.  The HMRC's position is crystal clear:  25% of each payment is tax free, 75% is taxable.

The IRS' position is less clear, but there seems to be a general consensus (on this forum, at least) that such an approach has merit.  Receipts should fall within 17.1a because they are taken as periodic pension payments, and hence would be tax free.  17.1b and 17.2 don't apply because payments are not cross-border (in my case).   A Form 8833 would need to be filed.  There is, however, always a risk of the IRS invoking 1.4 (saving clause) because 17.1a is not protected by 5a.