Local Government Pension schemes & Shared cost AVCs

Has anyone got experience of the Local Government Pension Scheme (LGPS)?

The LGPS is one of the largest pension schemes in the UK. It is a defined benefit pension scheme which means your pension is based on your salary and how long you pay into the Scheme.

I work for a local council and I understand that my pension contributions are automatic. As in i don't choose the % I put in, its done based on salary brackets. So the more i earn the higher the % of my salary I have to contribute to the LGPS. I cant increase or decrease this figure!

However i can chose to contribute to a AVC
Essentially a separate pension top up pot where I can add addition pension contributions (a rough calculation is that if i add £6 I get £10 on cashing out at retirement age). This would reduce my income tax and NI contributions, essentially a salary sacrifice scheme. 

im wondering what are the tax implications of this? anyone got any experience?

No experience but I am interested in the replies including how it is treated by the IRS now and in the future when withdrawals are made. (Can't remember if you are a USC or not but the responses would be useful anyway to others)

Hello and thanks for the reply!

to clarify! yes I am a USC! I have never lived there but I have a passport and a SSN! i enrolled in the tax system a few years back as i thought it was the right thing to do as I was thinking of moving there. a real accidental American with no direct (mother or father) ties.

im seeking advice on the US tax implications of this rather than the UK. If I was not a USC I would 100% be availing of this AVC right now.

 

Hello and thanks for the reply!

to clarify! yes I am a USC! I have never lived there but I have a passport and a SSN! i enrolled in the tax system a few years back as i thought it was the right thing to do as I was thinking of moving there. a real accidental American with no direct (mother or father) ties.

im seeking advice on the US tax implications of this rather than the UK. If I was not a USC I would 100% be availing of this AVC right now.

I just wish I could be helpful here. I have watched the video and it all looks like a good scheme. How the IRS views it I have no idea, but you are right to seek advice before signing up.

What do you mean by 'im seeking advice on the US tax implications'? The retirement pension income would be taxable just like any U.K. private pension, (U.S. Social Security is another story though) & 401(k)/IRA.

Just don't start any distribution prior to 59.5 unless you satisfy an exemption under IRS 5329

I thought I read somewhere that USC in the UK could have the equivalent of a 401k.... as in an employer pension which your employer matches your input. I think i also read that USC couldn't have a separate UK pension. This shared cost AVC is an additional pension put which my employer doesn't match fully. Maybe ive made this up; but i was sure i read that somewhere.

Edit: for clarity

Workplace or private. If it’s a pension under U.K. law then no problems.

Thanks for this.

I think i need to chat to a tax advisor about this. I do recall there was something about double taxation only covering the portion your employer matches and that anything above that was liable for some sort of tax!

Do you know of any Tax advisors that could help with this specific query.

thanks

I thought I read somewhere that USC in the UK could have the equivalent of a 401k.... as in an employer pension which your employer matches your input. I think i also read that USC couldn't have a separate UK pension.

My son has the equivalent of a 401k with his employer here but he doesn't pay into it it more than the employer match because I heard here that doing so may create a Foreign Grantor Trust requiring much more reporting at tax time. 

I don't why a USC couldn't have a separate UK pension. I receive 2 UK private pensions which I report on substitute 1099-R forms when doing my US taxes each year. I claim foreign tax credits to recover the US taxes paid on those pensions.

My son has the equivalent of a 401k with his employer here but he doesn't pay into it it more than the employer match because I heard here that doing so may create a Foreign Grantor Trust requiring much more reporting at tax time. 

I don't why a USC couldn't have a separate UK pension. I receive 2 UK private pensions which I report on substitute 1099-R forms when doing my US taxes each year. I claim foreign tax credits to recover the US taxes paid on those pensions.

This rings a bell!

I have two pensions here in UK! but I only pay into one right now. I report both to the IRS!

I pay into the one from my current employer, my other pension is from a previous employer (i do not pay into this pension)

my original question is in relation to your sons situation. I put in 8.5% of my salary and my employer matches this. However my employer's pension fund says i cant increase this amount. however I can start a separate pot with my employers pension provider whereby a £100 contribution only costs me £68.12. I understand it is employer matched but not by 100%.
For a basic rate tax payer, a £100 contribution only costs £68.12 - that's a 46.8% immediate value increas

This rings a bell!

I have two pensions here in UK! but I only pay into one right now. I report both to the IRS!

I pay into the one from my current employer, my other pension is from a previous employer (i do not pay into this pension)

my original question is in relation to your sons situation. I put in 8.5% of my salary and my employer matches this. However my employer's pension fund says i cant increase this amount. however I can start a separate pot with my employers pension provider whereby a £100 contribution only costs me £68.12. I understand it is employer matched but not by 100%.
For a basic rate tax payer, a £100 contribution only costs £68.12 - that's a 46.8% immediate value increas

I wish I knew the answer but I’m afraid I don’t.

Any of your contributions are deductible or excludable. As the contribution is above the line, you save on NI too. The IRS don’t care about the employer or tax relief, if you file a 2555 and you earn under the $100k + threshold then it’s not worth an exclusion. What is important is FinCEN 114 and 8939 reporting.

I don't have any direct experience of of LGPS but as I see it, it's not dissimilar to any other defined benefit scheme - most of which have closed their doors to new entrants (certainly in the private sector) - they're worth their weight in gold!!.

Here's my own experience of an AVC - when I left the US 25+ years ago, I cashed in my 401(K), paid the early withdrawal penalty (I recall 10%) and then invested the proceeds directly in a UK AVC (with Equitable Life - another story) - at the time I was in a DB scheme so the AVC seemed a sensible option for me to invest a modest lump sum and get 40% UK tax relief on the contribution.

Roll on 25 Years, the AVC had grown (there was no employer match and no further contributions from me) and I chose to split the proceeds, taking the maximum tax free amount and buying additional DB pension (effectively an annuity) with the remainder - not wanting to pay 40% tax otherwise. The value of the AVC was not huge (less than £25k, but a good value in comparison to the £4k I originally put in) but what I found surprising was that the UK tax free element was significantly more than the usual 25% - quite a complex area because of lifetime maximums and pre-A day rules.

See https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance for more information on lifetime allowances.

In terms of US tax of the lump sum, I declared 100% as taxable income because even then I was covered by FTC's and although it maybe I could have declared less, I deemed it not worth the hassle of a potential disagreement with the IRS - one of those is enough to last a lifetime, even if I did win my particular audit!

What I would say to the OP is get UK advice - Government DB schemes can be and have been lucrative - but there are pitfalls also if you breach the lifetime limits in terms of value. One of the reasons that so many NHS doctors have chosen to retire early is they've found that their pensions have breached lifetime allowances and UK income tax payable was quite penal (55% tax).

The other consideration is the annual allowance which is capped at £40k - but for DB schemes, this isn't the amount of your & your employer contributions but the increase in value of the scheme - a complex area.

The Pensions Advisory Service is a good place to start to get a more in depth understanding.