US SS, UK Pensions and WEP

Looking for some clarification regarding WEP on US SS pension and how it relates to UK pensions.  I currently receive US SS pension - started taking it at age 62.  My UK state pension is due when I'm 66.  I have 2 UK company pensions coming up - one is a deferred annuity and the other is a defined contribution, and my normal retirement age for both is 65, which is just around the corner.  I know that my US SS pension will be WEP'd at some point.  I'm seriously considering deferring my UK company pensions and maybe even my state pension when that becomes available, because I have another source of income.  So, my question is: when does WEP come into play - when I'm eligible for my UK pensions or when I start taking them?  I have a feeling that it's when I'm eligible, which would be disappointing.  I'd be interested in opinions and especially any references where it's documented definitively. Thanks.

I'm in a similar situation but my US SS is already WEP'd to the maximum monthly amount (I had 40 credits only). I am 66. I receive my UK & US SS pensions and a small private defined benefit pension. I have not yet entered drawdown with my SIPP (which is or will become my main pension when I need it).

When I went through my SS phone interview with the FBU in London they explained that WEP applied when I became entitled to my UK state pension (as US SS had not been paid on my UK earnings).  I think the key here is the word 'entitled' - others may have a different opinion but I believe deferring has no impact - the legislation is complex and the subject of continual debate  (and potential proposed amendments) I worked the maths out on deferring either of my state pensions and based on my estimates, it only became financially beneficial if I make it into my late 90's (fat chance!).

Good luck, I'd be interested to hear from the usual contributors on this one.

First I would check when you are entitled to OAP.  My wife and I were born in 1955 and were not entitled to OAP until age 67.

My wife didn't defer her OAP and was taking SS before her OAP was due.  She too had applied through the FBU in London and the month she started receiving OAP her SS was reduced due to WEP. So, I can't answer the question about the effect of delaying taking OAP but I suspect it would be on the due date.  That would make sense to me because I believe delaying OAP doesn't increase it except by the normal COLA amounts and when you apply for OAP the back years are then paid through increased payments or possible as a lump sum. (This happens sometimes when folks don't respond to the letter from DWP telling them they are eligible to apply for OAP)

I don't believe withdrawals from a defined contribution plan affect WEP, in fact I can't think of any way they could logically apply that. I believe only DB pensions and annuities from employment are considered.

Lastly I would look at how much the company pensions would affect WEP because WEP only applies for a portion of your SS, up to the 1st bend point. If the OAP exceeds the first bend point, currently at $1,024/month then delaying the private pensions beyond the OAP age will not effect WEP at all. (SS reduced at most by $512/month)

e.g. Full OAP is currently £185.15/week or approx $1,010/calendar month at today's exchange rate which pretty well fills up the  maximum WEP bucket so more pensions will not lower SS by much more.

https://www.ssa.gov/oact/cola/piaformula.html#:~:text=For%202022%20these%20portions%20are,of%20the%202022%20PIA%20formula.

Note also that once you have more than 20 years of SS contributions the amount of WEP goes down until it is zero at 30 years.

First I would check when you are entitled to OAP.  My wife and I were born in 1955 and were not entitled to OAP until age 67.

Thanks for that info.  I'll just address my UK state pension entitlement age first and digest the rest in slower time.  I'm absolutely certain that I get my pension at 66.  I've just double/triple checked on the gov's pension forecast website.  I was born in 1957, I can get my pension in 2023 when I'm 66.  I can't explain why you were born in 1955 and weren't entitled until age 67.  Are you sure you're not mixing it up with US state pension which I believe is normally taken at age 67?

My wife didn't defer her OAP and was taking SS before her OAP was due.  She too had applied through the FBU in London and the month she started receiving OAP her SS was reduced due to WEP. So, I can't answer the question about the effect of delaying taking OAP but I suspect it would be on the due date.  That would make sense to me because I believe delaying OAP doesn't increase it except by the normal COLA amounts and when you apply for OAP the back years are then paid through increased payments or possible as a lump sum. (This happens sometimes when folks don't respond to the letter from DWP telling them they are eligible to apply for OAP)

I don't believe withdrawals from a defined contribution plan affect WEP, in fact I can't think of any way they could logically apply that. I believe only DB pensions and annuities from employment are considered.

Lastly I would look at how much the company pensions would affect WEP because WEP only applies for a portion of your SS, up to the 1st bend point. If the OAP exceeds the first bend point, currently at $1,024/month then delaying the private pensions beyond the OAP age will not effect WEP at all. (SS reduced at most by $512/month)

e.g. Full OAP is currently £185.15/week or approx $1,010/calendar month at today's exchange rate which pretty well fills up the  maximum WEP bucket so more pensions will not lower SS by much more.

https://www.ssa.gov/oact/cola/piaformula.html#:~:text=For%202022%20these%20portions%20are,of%20the%202022%20PIA%20formula.

Note also that once you have more than 20 years of SS contributions the amount of WEP goes down until it is zero at 30 years.

I should have stressed that my motivation for delaying UK pensions is that I'm already in the 40% tax bracket when I add my US state pension (un-WEP'd) to the income I take from my Rollover IRA.  My thinking was that my UK pensions could take over as my IRA depletes - and by which time they'd hopefully be worth more.

My UK state pension forecast is only £141 a week (in today's money), because of insufficient qualifying years, so is short of max WEP if I understand you correctly.  However, I can believe that WEP starts at the entitlement age for UK state pension.  I don't know if they're "joined up" but it wouldn't be difficult for the US to know automatically when UK state pension is due.  I always assumed that I'd have to call the FBU and let them know when, and how much, I'd be receiving.

I really want to believe that my DC pension and deferred annuity will only come in to play when I decide to take them rather than at the entitlement age - which is in a few months.

If that's the case, then I don't have to do anything at the moment (other than defer those pensions) - which is good.

Just a couple of points for information:

Deferring UK OAP increases the amount payable at the rate of 1% for every 9 weeks of deferral:

https://www.gov.uk/deferring-state-pension

If you're short of the full entitlement for UK OAP, there may be an opportunity to 'buy contributions' - there's currently a small window that exists and IMHO it's more than worth it if you are eligible. Payback is I believe less than 3 years - follow the links in your state pension forecast for any years when you don't have enough contributions.

Just a couple of points for information:

Deferring UK OAP increases the amount payable at the rate of 1% for every 9 weeks of deferral:

https://www.gov.uk/deferring-state-pension

If you're short of the full entitlement for UK OAP, there may be an opportunity to 'buy contributions' - there's currently a small window that exists and IMHO it's more than worth it if you are eligible. Payback is I believe less than 3 years - follow the links in your state pension forecast for any years when you don't have enough contributions.

Yes, I've wondered about filling in the gaps.  I haven't worked out the numbers - don't actually know if I would be able to - but a couple of things make me wonder.   If I'm already in the 40% tax bracket (for the foreseeable anyway) is the payback actually 3 years?  The contributions I'd have to make are just over £800 a year.  Also, my wife is in a far worse position than me - her forecast is only £70 a week in today's money, and she has no company pensions or IRAs (although she would inherit mine).  It may make more sense to bump up her state pension, even though she's 7 years from claiming.

One of the things you can consider (if it’s available to you) is to pay in to increase your state pension and then roll your pension payments into a personal pension to receive the tax relief and reduce your tax rate. When the time comes you can then take 25% of your pension pot tax free and you could also be in a lower tax bracket by then. Having your own personal pension (such as a SIPP) gives you the freedom to draw down when it suits you and also to control your investments - it can also be passed on on death.

Thanks for that info.  I'll just address my UK state pension entitlement age first and digest the rest in slower time.  I'm absolutely certain that I get my pension at 66.  I've just double/triple checked on the gov's pension forecast website.  I was born in 1957, I can get my pension in 2023 when I'm 66.  I can't explain why you were born in 1955 and weren't entitled until age 67.  Are you sure you're not mixing it up with US state pension which I believe is normally taken at age 67?

Of course, you are correct. 

Don’t know what I was thinking,  I have been receiving my OAP since 2021.

Yes, I've wondered about filling in the gaps.  I haven't worked out the numbers - don't actually know if I would be able to - but a couple of things make me wonder.   If I'm already in the 40% tax bracket (for the foreseeable anyway) is the payback actually 3 years?  The contributions I'd have to make are just over £800 a year.  Also, my wife is in a far worse position than me - her forecast is only £70 a week in today's money, and she has no company pensions or IRAs (although she would inherit mine).  It may make more sense to bump up her state pension, even though she's 7 years from claiming.

For sure your tax rate makes a big difference in calculating how long the payback is and definitely I would choose first bumping up the one in the lower tax bracket.

Also look at the WEP effect. Until you hit that maximum then every £1 of extra OAP  will result in a reduction of £0.5 in SS.

One of the things you can consider (if it’s available to you) is to pay in to increase your state pension and then roll your pension payments into a personal pension to receive the tax relief and reduce your tax rate. When the time comes you can then take 25% of your pension pot tax free and you could also be in a lower tax bracket by then. Having your own personal pension (such as a SIPP) gives you the freedom to draw down when it suits you and also to control your investments - it can also be passed on on death.

Yes that's one option.  The IRA is basically a SIPP too, except that it's in the USA.  I adjust my withdrawals from that in order to reduce the amount of tax I pay in the UK.

For sure your tax rate makes a big difference in calculating how long the payback is and definitely I would choose first bumping up the one in the lower tax bracket.

Also look at the WEP effect. Until you hit that maximum then every £1 of extra OAP  will result in a reduction of £0.5 in SS.

Good to know.

BTW, seeing as you're in a similar position to me and probably worked it out, is there an optimum time for my wife to start taking her US SS?  I'm already taking mine (started at 62) but she's only 60, so the earliest she can claim is in 2 years - by which time I'm already entitled to UK state pension.  It would only be a spousal benefit - she has no credits of her own.  I know there's a formula, something like 50% of mine at full retirement age reduced for every month she takes it before her FRA.  But does my WEP come into it?

Good to know.

BTW, seeing as you're in a similar position to me and probably worked it out, is there an optimum time for my wife to start taking her US SS?  I'm already taking mine (started at 62) but she's only 60, so the earliest she can claim is in 2 years - by which time I'm already entitled to UK state pension.  It would only be a spousal benefit - she has no credits of her own.  I know there's a formula, something like 50% of mine at full retirement age reduced for every month she takes it before her FRA.  But does my WEP come into it?

I have seen tons of discussions on this and below is the best calculator I have seen on it.

I don’t know how WEP is applied in this case. 50% of your PIA or  50% of your PIA after your WEP had been applied?

https://opensocialsecurity.com/

It is a very personal decision.  Since I will have a much higher SS than my wife (more than double) and a lower life expectancy I am waiting until 70 since that maximizes my SS and should I die first  her SS will be bumped up to match mine.

WEP might affect spousal benefits but since your wife has no SS earnings I don’t think she will affected.

http://www.socialsecuritychoices.com/info/wep.php#:~:text=In%20addition%20to%20reducing%20a,widow(er)'s%20benefits.

In addition to reducing a person's retirement (or disability) benefit, WEP can indirectly reduce any spousal benefits based on that person's Social Security earnings record.
Notably, the indirect WEP reduction does not carry over to widow(er)'s benefits.

Yes, I've wondered about filling in the gaps.  I haven't worked out the numbers - don't actually know if I would be able to - but a couple of things make me wonder.   If I'm already in the 40% tax bracket (for the foreseeable anyway) is the payback actually 3 years?  The contributions I'd have to make are just over £800 a year.  Also, my wife is in a far worse position than me - her forecast is only £70 a week in today's money, and she has no company pensions or IRAs (although she would inherit mine).  It may make more sense to bump up her state pension, even though she's 7 years from claiming.

My wife just paid back some 6 years of contributions and each year of payback was just over £5 per week in gross pension  (can't remember the exact amount - but DWP future pensions will quote you over the phone). I certainly considered it worth it - even after the tax impact (20% or 40%).