Auto-enrolment in workplace pension

Hi,

Like many people working in the UK, this year I am going to be auto-enroled in the workplace pension being offered by my employer, unless I specifically request to opt out of it.

As a US citizen, I'm wondering what the impact will be to my US taxes if I take part in the pension.

It's defined as a Group Persional Pension Plan (GPPP), and the contributions are made using a salary exchange method. The employer will make contributions matching up to 1%.

I have until this Friday to choose to opt out of it.

If I do take part, am I opening the door to a world of pain and complicated tax forms from now on? I definitely want to avoid having to deal with PFIC's, or having to shell out a fortune for a tax professional to fill out time-consuming forms for me.

Thanks for any advice

Broadly speaking as a US person you would be required to report the vested accrued benefit of the plan in taxable income each year (IR code section 402(b) refers).

Separately, and depending on how you interpret the US/UK tax treaty, you could potentially elect to exclude that growth from current year income.

As you are a US person, you need to ask the pension provider if they can offer US compliant investments within the plan (excluding PFICs) and annual US compliant tax reporting to assist you in preparing your annual US income tax returns and the FBAR and Forms 8621 (if they insist on PFICs but have made a QEF election) and 8938.

For US citizens, the requirement for companies to default enroll employees in a GPPS, pension plan or NEST possess the same question as other UK pensions, basically "is it covered by the treaty".

If you take the stance that it is covered under the treaty you can exclude your and your employer's contributions and any gains on your account from your current taxable income. You will then have to pay income tax on any withdrawals you make in the distant future. This is the simplest approach, just file a treaty exemption claim on form 8833.

If you believe that the treaty does not apply, or choose not to apply the treaty, you will have to pay tax on the contributions and gains on you accounts. The chances that any of the funds you invest in are anything other than PFICs is remote so you'll have to deal with that reporting too. This second approach actually does have some advantages if you plan to retire back to the US if you can use FTC to pay the current US tax due leaving you with a large US tax free basis at retirement. If you are still subject to UK tax that advantage disappears. However, this approach is very technical and probably requires the services of a professional and you will have to get all the required financial information on your accounts.

I would ask at the US Embassy as I'm sure they get asked this question a lot. I bet that they will have a pretty common sense and easy answer for you. If you do ask at the Embassy let us know what they say.

Here is a good explanation.

http://www.expatattorneycpa.com/id70.html

Hey guys, thanks for your response.

Let's suppose I can claim my pension as covered by the tax treaty, and not have to deal with paying US tax on its gains. I'm wondering if it's even worth participating in from a general investment standpoint.

The pension has a bunch of funds to choose from, including some index funds, but they seem to all be actively managed -- at least there is an annual fund charge associated with each, the absolute minimum of which is 0.5%.

So option 1: set aside x% of my paycheck to go into my UK work pension, and get free money from my employer, who will match up to 1%. But be restricted to a less-than-ideal selection of funds, with management fees.

Option 2: Alternatively I could take that x% of my paycheck and contribute it to my Roth IRA, which I already have set up with Vanguard, where I could invest in passive index funds with low expense ratios. The problem with this is that my only source of income is in GBP, so I would have to convert currencies to transfer it into my Roth, resulting in some loss. Also, I would miss out on the "free money" that comes from my employer's contribution.

I'm not sure which option makes more sense. They both result in some loss, I just don't know which would be greater.

If I only plan to stay at my current employer for the next 5 years, then when I leave I could potentially roll that pension over to a different UK provider who might offer more favourable passive index funds, maybe even Vanguard ETFs, which would have low expense ratios and be recognised by the IRS for easy tax reporting.

I'm a bit over my head here, and need to decide by Friday... ugh
Any thoughts are most welcome!

Contributing to the ROTH is an excellent idea. You will have to show earned income on your 1040 though to do this and probably use FTC instead of the FEIE. Vanguard is an excellent choice of company as they have the lowest fees around.

The costs of UK pension and investment funds are high when compared to Vanguard and many other low cost US funds, but 0.5% annual fee isn't too bad, it's the 1% up front costs that really hurt. The employer contribution makes up for those fees so I would probably still go for the company pension fund. I would do the pension and the ROTH if you can!

It's good that you are thinking about this. If you have any doubts why not do the ROTH now and defer joining the pension until you have an answer from the US Embassy. You can always join at a later date.

I just called the US Embassy in London and spoke to the IRS department there, asking about the pension. I described it as a "group personal pension", which -- when leaving the employer -- will detach from the group and become a standard personal pension.

They told me that since I am only making contributions to the pension at this point, I do not need to worry about reporting it on my US tax return. I asked if I needed to report my employer's matching contributions, or any capital gains on the investments, and was told no, these don't need to be reported because it is a UK pension, which is treated differently than, say, a stocks & shares ISA (which would be considered an interest in a foreign trust).

I asked if I needed to file form 8833 to claim treaty exemption, and was told no, this is not necessary. The only place I need to report the pension is on the FBAR.

When it will start to matter is when I retire and begin taking distributions from the pension. At that point, depending on which country (US or UK) I am a resident, that country will get "first bite" at taxation on the distributions, and the foreign tax credit can be used to avoid double taxation.

Well done, you asked all the right questions and the US Embassy gave all the common sense answers.

I just called the US Embassy in London and spoke to the IRS department there, asking about the pension. I described it as a "group personal pension", which -- when leaving the employer -- will detach from the group and become a standard personal pension.

They told me that since I am only making contributions to the pension at this point, I do not need to worry about reporting it on my US tax return. I asked if I needed to report my employer's matching contributions, or any capital gains on the investments, and was told no, these don't need to be reported because it is a UK pension, which is treated differently than, say, a stocks & shares ISA (which would be considered an interest in a foreign trust).

I asked if I needed to file form 8833 to claim treaty exemption, and was told no, this is not necessary. The only place I need to report the pension is on the FBAR.

When it will start to matter is when I retire and begin taking distributions from the pension. At that point, depending on which country (US or UK) I am a resident, that country will get "first bite" at taxation on the distributions, and the foreign tax credit can be used to avoid double taxation.

My reply may sound mean and cruel, but I think you really need to know the risks and complexities here.

I would trust that you have the name and badge number of the IRS employee you spoke with?

Given that the advice you have been provided is not in accordance with Federal law; I would not suggest that you follow it.  IRS employees do not have the power to create or change the law.

1. Employer contributions are includible - the law says so (section 402(b)); the IRS cannot change the law - it would require a President to sign something were that to happen.
2. Growth may be taxable (section 402(b) again)
3. You can, however, elect annually (or not elect) to claim the benefits of Article 18 of the Treaty, depending on how you interpret the words and the context of Article 18.
4. You may decide not to claim under Article 18, use excess foreign tax credits and create basis in the plan.
5. An ISA is not a trust; I do not think it is possible to hold an ISA in a trust. This is a spurious suggestion.
6. If you transfer the monies in the future to a non-employer sponsored pension you will arguably then have a foreign trust and foreign trust reporting may become relevant.
7. Mandatory PFIC reporting on Form 8621 is only temporarily suspended.
8. If applicable, Form 8938 reporting will be mandatory.
9. If applicable, Form 8960 will be mandatory.
10. You are talking of salary sacrifice, so might want to review Internal Revenue Section 409A.
11. Once you leave the employer it becomes even more mysterious what is reportable, partly because the law and the treaty are unclear and partly because UK law will not require that the monies invested are ever used to purchase an annuity.

Yes, I did take down the employee's name and badge number. It's sounding like it might do some good to actually go in during the walk-in hours to get this sorted out. I'll take all the information you've given me and go to the embassy in person, maybe even get something from them in writing if possible.

Yes, I did take down the employee's name and badge number. It's sounding like it might do some good to actually go in during the walk-in hours to get this sorted out. I'll take all the information you've given me and go to the embassy in person, maybe even get something from them in writing if possible.

You are doing all the sensible things, I think you will be ok. I would file an annual 8833 to document your reasons for exempting your and your employer's contributions and any gains on the pension funds from your current tax return.

Guya has covered all the bases and does note that the treaty is open to interpretation. I think you have a sensible interpretation from the IRS person at the Embassy that will allow you to save for retirement and satisfy your US tax obligations. If you were not to use Article 18 things would be a lot more complicated. Definitely get the name and information of the agent that gave you the advice and watch out for 8938 filing

Unless you have a MAGI as a single filer of over $200k Form 8960 won't be required.

Hey guys, just wanted to follow up on this to share what I've learned, in case there are others in my same position.

I've just come back from the US Embassy where I met with a couple members of the IRS department there. I took with me some notes from this conversation, specifically the references to IRC section 402(b) and 409A, and questions about the UK/US tax treaty Article 18, and form 8833.

The basic gist of my meeting was: "stop worrying so much."

The IRS employees I spoke with (btw to my surprise they're a friendly, down-to-earth bunch!) told me that since I am taking part in a standard UK pension, which behaves like all regular UK pensions do, I do not need to worry about reporting my contributions, my employer's contributions, or any growth in the fund on my federal income tax return. It is only when I start taking distributions from the pension that I will start to pay tax on it, and at that point it will depend on which country I am resident.

I asked them what happens when I leave my employer and roll over the pension into a regular UK personal pension. So long as it's a direct rollover into a pension that behaves the same way, again I don't need to worry. They said that the idea of treating a personal pension as a foreign trust, and having to worry about foreign trust reporting, was a highly conservative stance to take ("paranoid" in fact was the word they used).

Another notable quote from them: "I have never known anyone to file a form 8833 for a UK pension." Form 8833 comes in to play if you are taking an abnormal position with regard to the tax treaty, and omitting a UK pension from your income is not an abnormal position.

Again, I was told that the only place I need to report my UK pension is on my FBAR, and form 8938, if applicable.

Guya, thanks very much for your advice and help with this, it was very helpful to have some notes to take with me from someone who knows what they're talking about. I appreciate that as a tax professional it is in your best interest to take as careful and conservative a position as possible. But it definitely put my mind at ease to learn that the IRS is not nearly as draconian and punitive as one might think. They want you to be able to invest for retirement and the tax treaty is there to help you with that, and avoid double taxation wherever possible.

If you are an ordinary person with an ordinary income taking part in an ordinary UK pension, there's no reason to freak out or think that your taxes have just become incredibly complicated. File your FBAR, file your form 8938, take the foreign tax credit, and Bob's your uncle.

I'm not that surprised by the advice you got form the IRS folks at the Embassy. I've called them a couple of times and they are always friendly and give common sense answers.

Using the treaty is definitely the simplest approach, but for some people it might not give the best financial outcome. However, most ordinary people will put simplicity and peace of mind over the potential future gains they might get by using some more complex strategy.

The only bit of the IRS conversation that puzzles me is that they had never heard of anyone using an 8833 for a UK pension. That seems very strange to me. The application of the treaty might be implicit in their view, but I'd still file the 8833 just to make sure that the omission of UK pension gains and contributions from your 1040 etc is explained, particularly if the pension appears on 8938. The 8833 is to make a treaty claim, I don't agree that it is used to take an "abnormal position with regard to the tax treaty".

The only bit of the IRS conversation that puzzles me is that they had never heard of anyone using an 8833 for a UK pension. That seems very strange to me. The application of the treaty might be implicit in their view, but I'd still file the 8833 just to make sure that the omission of UK pension gains and contributions from your 1040 etc is explained, particularly if the pension appears on 8938. The 8833 is to make a treaty claim, I don't agree that it is used to take an "abnormal position with regard to the tax treaty".

nun, could it be as simple as what Pub 519 says (2014 revision, page 48)?

"Exceptions. You do not have to file Form 8833 for any of the following situations.

[...]

2. You claim a treaty reduces or modifies the
taxation of income from dependent personal
services, pensions..."