Just signed up for workplace pension-- what do I need to know?

Hi,

My employer is getting a jump on the mandatory pension requirement, so I've signed up.  Right now, my employer is contributing 5%, I'm also contributing 5% myself, and, if I understand it correctly, I'll be getting tax relief as well, meaning the UK government will be making a small contribution (25% of my 5%).

I've read through several previous threads, and I have a few questions:

• Is it true that the employer contribution is considered income?
• What about the 'tax relief' contribution?
• What about any interest earned on it?
• Is it all just lumped together as earned income, which qualifies for the foreign earned income exemption?  Or is it some separate category, the way self-employment income would be?
• What about FBAR, etc.?  Does it need to be reported? Do I need to let the pension company know that I'm a U.S. taxpayer? (I mentioned this to our admin, but she doesn't know anything about it, and so assumes that I'm nuts.)

I'm not worried about ending up owing tax, as long as this qualifies for the exemption-- I'll never come anywhere close to the ~$98K threshold.  But I've never had enough money to need to file an FBAR before (and I probably still won't, for at least a few years), so I'm not sure exactly how that works, or what I need to look out for.

Well done for thinking about this and doing your research. You need to find out the structure of your pensions. Do you have a selection of funds and are you able to move the money around between the various investments? If you do you'll need to file an FBAR once you meet the account value threshold.

There are various approaches to dealing with a UK pension on your US taxes....the simplest is.......do nothing apart from filing the requires informational forms. There is a tax treaty between the US and the UK that keeps your UK pension contributions and gain US tax free. When you take income you need to include that on your US 1040. Alternately you could declare all the contributions to the UK pension as income, pay US tax on them now, and build up a big US tax free pension pot so that it would be almost US tax free when you take income. Most people will take the first option as it's simple, but if you have enough tax credits, deductions, allowances etc the second might be financially better.

By the way you can't use the FEIE on employer pension contributions because they are not classed as earned income.

This is a good thread that explains a lot.

http://talk.uk-yankee.com/index.php?topic=81730.0

Do you have a selection of funds and are you able to move the money around between the various investments? If you do you'll need to file an FBAR once you meet the account value threshold.

Um...I'm not sure.  Our pensions are being set up with Nest ([url]http://www.nestpensions.org.uk[url]).  As I understand it, I can choose a particular fund plan (i.e. Retirement Date-based, 'Ethical', Higher- or Lower-Risk, etc.), but that's it.  I don't know whether, or under what circumstances, I can switch between those plans, and I don't think I can split money between the different plans (i.e. 50% in Retirement Date, 50% in High Risk).

So does that count as reportable, or no?  I don't really mind either way, just making sure.

There is a tax treaty between the US and the UK that keeps your UK pension contributions and gain US tax free....By the way you can't use the FEIE on employer pension contributions because they are not classed as earned income.

And from the other thread, Jugdish saying:

"The IRS employees I spoke with 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."


And now I'm confused again.  If I'm going the simple, I'll-pay-tax-when-it's-disbursed-assuming-I-live-that-long route, does that mean that I:

A) Report only my earned income, minus my 5% pension contribution, and use the FEIE as usual, and don't bother about the employer & tax-relief contributions, or interest?

B) Report my entire earned income (incl. the 5% I put into my pension) and use the FEIE as usual, and don't bother about the rest?

C) Report my entire earned income (incl. the 5% I put into my pension) and use the FEIE, then report the Employer contribution (and tax-relief contribution?) as some other line on the 1040, with a separate exemption (is that the 8833?)?  What about interest?

D) As C, but I'd be liable to pay tax on some or all of the Employer/government contributions, because they aren't exempt?

Sorry if I'm being particularly dense.  I've just always had quite straight-forward, DIY tax returns, and I'd really like to keep it that way. 

NEST is a defined contribution retirement plan. It is very similar to a 401k plan in the US. You are able to choose between a number of funds and switch your investment and contributions between those funds. So you will have to do FBAR and also 8938 when you meet the thresholds.

If you go the simple route, then option A) in your last post is the way to go. You can use the FEIE to avoid US income tax (up to the FEIE limit) on your earned income and the treaty to defer US tax on contributions and gains in your NEST funds.

You might want to look at whether it's better to use foreign tax credits rater than FEIE to defray your US tax bill as you might end up with some excess tax credits.

You might want to look at whether it's better to use foreign tax credits rater than FEIE to defray your US tax bill as you might end up with some excess tax credits.

Thanks for clearing all that up.

But I'm not sure what you mean by excess tax credits?

You are going to be paying UK income tax. You now have two options of how to deal with your US income tax; you can either just use the FEIE to exclude UK earned income (up to the FEIE limit) from your US taxes; or you can apply the UK tax you've already paid to your US tax bill using the foreign tax credit rules. If the UK tax you've paid is more than your US taxes then you end up with some "excess foreign tax credits". These can be carried forward and might prove useful.

Thanks for posting this question woadgrrl.  I also recently started my new employer's pension scheme so had all the same questions!  

If I may but in -- to include my own specific question...

My company has a "group Self Invested Personal Pension (SIPP)" through FriendsLife/Pensions Limited. --sounds similar to the one Jugdish signed up for a little while back.

My most recent role was a contract through an umbrella company but I had contributed somewhere around £150 to a pension with Nest.  I will be able to transfer the money across from NEST to FriendsLife, and will work out those details, but am wondering-- Are there are any US-tax implications regarding that pension fund transfer?

A transfer between UK pensions recognized by the treaty is not a US taxable event.

You are going to be paying UK income tax. You now have two options of how to deal with your US income tax; you can either just use the FEIE to exclude UK earned income (up to the FEIE limit) from your US taxes; or you can apply the UK tax you've already paid to your US tax bill using the foreign tax credit rules. If the UK tax you've paid is more than your US taxes then you end up with some "excess foreign tax credits". These can be carried forward and might prove useful.

I  see.  Thanks for explaining.

I'd love to think that I'll someday have enough money to worry about that, but I doubt it.