US SS, and UK Pensions, WEP etc...

Hi Everyone, new here!
Trying to figure out this whole UK pensions thing and how it impacts my SS benefits.
At the moment, I am confused by it all!

I am a 57 year old Ex-Pat Brit, living in the USA 18 years now. I am a Greencard holder currently, but eyeing citizenship when my card expires.

Here is my situation:

1/ I have 22 years of "Full Contributions" in the UK, and my pension forecast at retirement is 148.65GBP/week which is 646.36GBP/Month or 7,756.34GBP/PA.

2/ I also have a "Employee" pension. In a recent statement they are "Projecting" an income of 8,200GBP/PA if I don't take a "Lump Sum Payment".

3/ I have completed the required 40 quarters to qualify for USA SS Benefits, and my statement projects about $1250/month.

4/ Currently self employed, and not earning much($10,000/PA), and don't expect to be able make any further SS, or UK contributions.

Questions:
A/ Will my UK Gov pension be affected by the WEP rules, and if so, what will the impact be?

B/ What about my UK private Pension payments?


To add to my confusion, I was offered an "Early retirement" option from my UK private pension. I could take this now, to help me financially. It looks like 2 options... a straight Annual payment, or a Lump sum and a lower annual payment.
I don't know what to do!

Help, advice, or knowledge please!

WEP only affects US social security - doens't affect your UK OAP at all nor does it affect your private pension. When you apply for SS benefits, it will automatically be calculated (there is a formula, but I have no specific knowledge - you can Google to get the gist of it).

Your SS forecast of $1250 likely doesn't include WEP effects, as the US SSA doesn't have the info at this point to factor that in.

If you are self-employed, you will be paying SE tax if your earnings are sufficiently high (again, I am out of that game, so haven't kept up with it). SE tax is essentially the same as FICA - except you pay *your* contribution AND what your employer would have contributed. (It's a little more complicated, but that's the super simple way to think of it). So yes, you actually will be paying more US contributions if you continue to be self-employed.

I'll start with the basic consequences based on your excellent information.

The payout amounts of your UK State Pension and your UK company pension will be unaffected by WEP. Your US SSA benefit will take a substantial hit.

First, you will need to determine when you will reach your ELY (Eligibility Year). That is normally when you reach age 62. The following chart at the bottom of the linked page determines the maximum amount your SS benefit can be reduced.

https://www.ssa.gov/planners/retire/wep-chart.html

If you wish to go into details, we can, but it is not a straightforward explanation.

If, for example, 2018 were your ELY (and it won't be), the Max WEP  foreign pension income occurring for those with less than 20 years of substantial earnings is $895/month (at present rates, you're well over this), calculated at the exchange rate on the day the benefit is approved. Any amount of foreign pensions will reduce your SS benefit - IF you have less than 30 years of substantial earnings. $895 is the Maximum amount of foreign pension income that can be taken into account for those with a 2018 ELY. WEP has a guarantee - you are only dinged at a maximum of 50% of your total foreign pension income OR, 50% of the Max WEP figure for your ELY (for 2018 - $895). So,....if your ELY is 2018, the Max WEP amount is $447.50/month (50% of $895).

Calculate your potential SS benefit/month and subtract $447.50.

A very good calculator, which includes WEP considerations, can be found at:

https://www.ssa.gov/planners/retire/anyPiaWepjs04.html

EDIT TO ADD:

You are 57 now, so you will reach 62 in 5 years time. IF, at that time, you had 23 years of SUBSTANTIAL EARNINGS, the Max WEP amount per month deducted from your SS benefit would be $313.30 (according to the chart linked above for someone with a 2018 ELY - your ELY will be roughly 2023). Use the WEP calculator linked above - it gives a fairly accurate estimated WEP result for your projected SS benefit.
 


   

Thanks for the replies!

Its gonna take me a bit to digest this good info.. but here are a couple of thoughts.

Yes, I was aware that WEP only impacts the US SS payment, when I eventually get that!
I just wasn't sure how much...

I tried to include as much info as I have because it all seemed like it was important.

The last 8 years have been a struggle... Divorce, health issues, job loss, home loss, and the subsequent downward spiral. As they used to say, "The Hits just keep on coming!".
I'm trying to get back on my feet, with a new career, but all this stuff weighs on the mind, and I'm trying to figure out the income, and tax ramifications.

I was actually quite surprised to get my SS statement, and see I had hit my 40 quarters, as I thought I missed it.

I'd like to take the UK private pension early retirement package, as it would make a difference in my day to day life, but am worried about it hurting me more than it helps!

I'd like to take the UK private pension early retirement package, as it would make a difference in my day to day life, but am worried about it hurting me more than it helps!

The general concern about taking a partial UK pension (lump sum plus reduced payout) for a person resident in the US for US tax purposes is, as of yet, not clearly defined. I would draw your attention to the first two pages of the following recent discussion:

http://britishexpats.com/forum/usa-57/uk-pensions-related-uk-us-tax-treaty-894492/

There is also this discussion by one tax advisor (which is therefore, their opinion):

http://intltax.typepad.com/intltax_blog/2017/12/lump-sum-distributions-from-uk-pensions.html

When in a similar situation I elected to take the full pension with no lump sum and have had no regrets, but everyone must make that decision for themselves based on their own unique circumstances.

My head is SPINNING!

Do additional years of SS payments after ELY have any affect on the WEP calculation? For instance, if one had 22 years of contributions in ones ELY but carried on working to age 70 without taking SS benefits, one would now have 30 years of contributions. Would that negate the WEP provision?

Do additional years of SS payments after ELY have any affect on the WEP calculation? For instance, if one had 22 years of contributions in ones ELY but carried on working to age 70 without taking SS benefits, one would now have 30 years of contributions. Would that negate the WEP provision?

An excellent question. It's my understanding that if the number of substantial earning years, at the point you start claiming Social Security, is 30 or over, then WEP would not be a factor.

There is an explanation on the SSA site concerning delaying retirement and its effect on WEP. Scroll down to the topic "If You Choose Delayed Retirement" on the following page:

https://www.ssa.gov/planners/retire/wep.html

That page confirms delaying the initiation of payments beyond age 66 (the full benefit year - regardless of ELY) will reduce the amount of WEP.

It might be advantageous to call (or Email) the Federal Benefits Unit at the US Embassy to receive a precise answer to your question.

https://uk.usembassy.gov/u-s-citizen-services/federal-benefits/

 

An excellent question. It's my understanding that if the number of substantial earning years, at the point you start claiming Social Security, is 30 or over, then WEP would not be a factor.

There is an explanation on the SSA site concerning delaying retirement and its effect on WEP. Scroll down to the topic "If You Choose Delayed Retirement" on the following page:

https://www.ssa.gov/planners/retire/wep.html

That page confirms delaying the initiation of payments beyond age 66 (the full benefit year - regardless of ELY) will reduce the amount of WEP.

It might be advantageous to call (or Email) the Federal Benefits Unit at the US Embassy to receive a precise answer to your question.

https://uk.usembassy.gov/u-s-citizen-services/federal-benefits/

 

On the contrary, that actually states the amount of WEP increases by delaying benefits till age 70. The amount of SS benefit increase but so to does the WEP. See below

Your eligibility year is still 2013.

If your retirement benefits start after your full retirement age (66 years) the benefit increases 8% for each year before age 70 that you delay retirement. If your benefits start at age 70, you get credit for the 48 additional months when you did not get benefits and your monthly benefit will be 32% higher.

Your age 70 retirement benefit is $1,320 ($1,000 x 132% = $1,320). If your full retirement benefit had not been reduced by WEP, your age 70 retirement benefit would have been $1,842. Delaying retirement increased the reduction for WEP from $395.50 to $522.

On the contrary, that actually states the amount of WEP increases by delaying benefits till age 70. The amount of SS benefit increase but so to does the WEP. See below

Your eligibility year is still 2013.

If your retirement benefits start after your full retirement age (66 years) the benefit increases 8% for each year before age 70 that you delay retirement. If your benefits start at age 70, you get credit for the 48 additional months when you did not get benefits and your monthly benefit will be 32% higher.

Your age 70 retirement benefit is $1,320 ($1,000 x 132% = $1,320). If your full retirement benefit had not been reduced by WEP, your age 70 retirement benefit would have been $1,842. Delaying retirement increased the reduction for WEP from $395.50 to $522.

Ouch, that is a lot. I am in a similar situation with 23 years of SS contributions.

On the contrary, that actually states the amount of WEP increases by delaying benefits till age 70. The amount of SS benefit increase but so to does the WEP.

I stand corrected.

Accordingly, the ELY is all important, judging from the other scenarios on the page. There is no date as to when the page came into existence, and I must confess I've never seen this page before today, and then I misread "increased the reduction", thinking that meant a "reduction" in WEP (but on closer examination, yes, the figures support it is an increase in WEP - well spotted.)

Whether the entitlement year (vs. eligibility year - ELY) is either delayed or is early, the overriding factor seems to be the ELY. If I read this correctly, in the example given, if, at age 62 (the eligibility year), one had 28 years of substantial earnings and elected an entitlement date 6 years hence (at age 68 with 34 years of substantial earnings), a WEP figure based on their situation at ELY would still be applied and the fact they had over 30 years of substantial earnings at entitlement would be of no consequence. Is that your understanding also?

There is a thread on a sister site (for British expats) that has been running for years and is up to, at latest count, 100 pages. It has at one time or another gone into just about all aspects of WEP. I do not remember the situation above ever being discussed or pointed out. I do wonder if the above interpretation is a recent development. I have a feeling this may put the cat amongst the pigeons on that site.

 

Yes, it appears the the WEP calculation is set and fixed at qualifying years at age 62 or ELY. So even though one is still legally obliged to contribute FICA taxes and the qualifying years will increase, the WEP calculation will be per ELY. The benefit will increase by 8% each year not claimed but the amount of WEP clawed back will increase along with that.

So in my case I will actually get penalized for contributing more into the system. If

I'm in a slightly similar position (aged 62) having just got to 40 credits for US Social Security, but I'm UK resident. I've been contemplating deferral of my UK state pension (fully entitled at age 66 and currently circa £159 per week) so that I can then (I Hope) defer WEP until drawing my UK state pension - I'm presuming my private pension will not impact WEP?.

The UK state pension increases by 1% for every 9 weeks of deferral and is just under 5.8% per annum. I know it all gets down to life expectancy etc, and I'm not enough of an anorak to work out the breakeven point of deferring when taking into account the WEP reduction !

I'm in a slightly similar position (aged 62) having just got to 40 credits for US Social Security, but I'm UK resident. I've been contemplating deferral of my UK state pension (fully entitled at age 66 and currently circa £159 per week) so that I can then (I Hope) defer WEP until drawing my UK state pension - I'm presuming my private pension will not impact WEP?.

Let's start with some Social Security Administration definitions:
Eligibility - is when you secure all requirements for drawing a foreign pension, but have not yet 'activated' the pension.
Entitlement - is the point where you have secured eligibility, applied to start receiving the pension, have been approved by the pension provider as a beneficiary, and start receiving the actual pension.

It is assumed an individual may defer WEP deductions on US SS at 'eligibility', but once 'entitlement' of the foreign pension has been achieved, it can no longer be deferred. You are under obligation, by US SSA, to notify them when you do start receiving the foreign pension, and at that point WEP will be applied to your US SS benefit.

On your second point regarding your private pension - ALL/ANY foreign pensions (non-contributing to the SSA system) will give cause for a WEP deduction from your US SS, provided the contributions to that pension were not 'voluntary' as in the sense of reduced contributions the UK State pension (old Class 2) for those resident outside the UK are possible. If your private pension is, for example, a company pension, it will contribute to a WEP calculation and deduction once the pension reaches the entitlement stage. As for a SIPP, it may be wise to contact the Federal Benefits Unit at the US Embassy for a determination. My opinion would be a SIPP may be considered applicable for WEP.

Thanks very much for your comments here - obviously a 'Guru' with good reason!

I've got less than 4 years now to consider matters although from your response it appears there may be very little I can do from a planning perspective and as I only have 40 credits and therefore WEP is inevitable - still I always considered getting a US SS  pension somewhat of a bonus anyway - and I'm still nervous that Trump might find a means to take that away also!