US ExPat Pension Working in the UK

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LifeIsGood
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US ExPat Pension Working in the UK

Post by LifeIsGood »

My granddaughter is a US citizen currently working in London for an undetermined length of time. She’s eligible for a UK pension plan (with a 5% match) but it appears that it will be double taxed by the US/UK when the funds are withdrawn at retirement age. There is also an option to transfer her UK pension to a ‘Qualifying Recognised Overseas Pension Scheme’ (QROPS) as a tax free transfer but there aren’t any current QROPS in the US.
I realize I’m looking for a unicorn but does anyone have any knowledge/experience in this area and could perhaps offer any other options? As things stand it seems to me she would be better off not contributing to the plan.
Valuethinker
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Re: US ExPat Pension Working in the UK

Post by Valuethinker »

LifeIsGood wrote: Fri Jul 02, 2021 6:21 am My granddaughter is a US citizen currently working in London for an undetermined length of time. She’s eligible for a UK pension plan (with a 5% match) but it appears that it will be double taxed by the US/UK when the funds are withdrawn at retirement age. There is also an option to transfer her UK pension to a ‘Qualifying Recognised Overseas Pension Scheme’ (QROPS) as a tax free transfer but there aren’t any current QROPS in the US.
I realize I’m looking for a unicorn but does anyone have any knowledge/experience in this area and could perhaps offer any other options? As things stand it seems to me she would be better off not contributing to the plan.
Re taxation at retirement.

Not sure how that works but if she retires in the UK she has to file for US taxes as well - but that's irrespective of the source of income. i.e. that would be true wherever she is in the world? It is simply true that if she has pension income, and she is a US citizen, she will at least have to file (if not pay tax) in the USA as well as in her country of residence. But that's true of any investment she has, anywhere, ever under current US tax law. She gets a credit in the US for the tax she already pays in the UK, as I understand it?

As to the investment returns in the pension until she is age 57 (the current limit lower age on pension withdrawals (we are at 55 but it is planned to raise it I believe)) - I believe that will be untaxed because it is covered by UK-US tax treaty (Ted Swippet will havet the details -- also see wiki here).

Pensions are thus one of the most effective forms of saving for an American resident in the UK.

QROPS are a minefield, and I am sure by the time she retires different (not necessarily better) arrangements will be in place.

So I would conclude she absolutely should grab the legally required employer match (I believe that is 3%, so the 5% means the employer is being generous). The formula is 4% employee + 3% employer + 1% govt = 8% into the pension account. AFAIK you cannot avoid that. But in her case 5% at least to get the match.

The downside is this small lump of money that you have to keep the paperwork on, update your address etc for the next 30-40 years.

The upside is that a small amount of money invested over that long time period can become a big amount of money (something similar has happened to me in the last 30 years). If she has any choice in it, I would recommend a global equity index fund (which would be about 60% US stocks in any case). It's the one trip to the casino that, if you live long enough and keep your costs low, you can actually win.
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Re: US ExPat Pension Working in the UK

Post by Valuethinker »

Just PM'd Original Poster about relocating this to the non-US investing sub board.

That's where we tend to get the expatriate American thorny tax problems questions and answers.
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Re: US ExPat Pension Working in the UK

Post by LadyGeek »

This thread is now in the Non-US Investing forum (US ex-pat in UK).
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TedSwippet
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Re: US ExPat Pension Working in the UK

Post by TedSwippet »

LifeIsGood wrote: Fri Jul 02, 2021 6:21 am My granddaughter is a US citizen currently working in London for an undetermined length of time. She’s eligible for a UK pension plan (with a 5% match) but it appears that it will be double taxed by the US/UK when the funds are withdrawn at retirement age.
It shouldn't be double-taxed, exactly. Tax here is controlled by the US/UK treaty. Typically, if a US resident on withdrawing, it would be US-taxable only. If a UK resident, it would be taxable to both countries (because of the US's obsession with its citizenship-based tax regime), but with the US bound to credit UK taxes paid that may/will wipe out any actual US tax liability, so that overall there is strictly no double-tax. Rather, the higher of the two countries' rates and the lower of their allowances.

The main problem will be keeping up with the maddening and copious annual reporting requirements that the US has (and continually adds to) for 'foreign' accounts and treaty claims. FBAR (FinCEN 114), FATCA, perhaps forms 3520 and 8833, and so on.

A good Google search should turn up a few articles describing how this can all work. The US/UK tax treaty is here:

https://www.irs.gov/businesses/internat ... -documents

The 'Technical Explanation' expands on the terse prose in the actual treaty.
LifeIsGood wrote: Fri Jul 02, 2021 6:21 am There is also an option to transfer her UK pension to a ‘Qualifying Recognised Overseas Pension Scheme’ (QROPS) as a tax free transfer but there aren’t any current QROPS in the US.
Right. Best to steer clear of QROPS. Dodgy schemes abound, and even those that are usable, perhaps Malta, present horrible difficulties for US citizens. Even though not watertight, the US/UK tax treaty is about as good as things get when it comes to US tax treatment of pensions, and by moving a pension out of the UK you would lose coverage of that treaty.
LifeIsGood wrote: Fri Jul 02, 2021 6:21 am I realize I’m looking for a unicorn but does anyone have any knowledge/experience in this area and could perhaps offer any other options? As things stand it seems to me she would be better off not contributing to the plan.
Financially, she should be okay contributing to the plan, thanks to a relatively decent US/UK tax treaty. There are some practical considerations, though. The UK allows no elective early access at all to pensions; that is, nothing before age 55 (rising to 57 in future). That could mean decades of handling -- or perhaps paying somebody to handle -- the excruciating annual US tax reporting on a UK pension so as to reap the benefits of the treaty. For a short-term period of UK employment, the costs of all this reporting alone might outweigh the pension balance itself.

Finally, because of FATCA, your granddaughter will be unable to invest in normal and vanilla UK based accounts, for example ISAs. Most UK platforms now turn down US citizens as customers, to minimise their own risks and reporting costs. And if she can find a UK platform that will take her, more or less every fund or ETF on it will be a US tax death-sentence due to the US's horrible PFIC tax law. So her main avenues for investing would be through US based accounts -- though watch out for the UK's 'non-reporting status' fund tax regime, somewhat analogous to PFIC, though far less savage -- or through a UK pension (PFIC rules do not apply inside a pension).

Areas of the wiki that should be useful:
- Tax issues specific to US persons living outside the US - Bogleheads
- Vanguard US domiciled ETFs that are UK HMRC reporting funds - Bogleheads
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Re: US ExPat Pension Working in the UK

Post by ivgrivchuck »

LifeIsGood wrote: Fri Jul 02, 2021 6:21 am My granddaughter is a US citizen currently working in London for an undetermined length of time. She’s eligible for a UK pension plan (with a 5% match) but it appears that it will be double taxed by the US/UK when the funds are withdrawn at retirement age. There is also an option to transfer her UK pension to a ‘Qualifying Recognised Overseas Pension Scheme’ (QROPS) as a tax free transfer but there aren’t any current QROPS in the US.
I realize I’m looking for a unicorn but does anyone have any knowledge/experience in this area and could perhaps offer any other options? As things stand it seems to me she would be better off not contributing to the plan.
U.S. treatment of foreign pension plans is outright hostile. To stay in full compliance, she might have to hire a tax specialist to fill out the right forms every year, potentially costing thousands of dollars per year until retiring.

Especially if this is a temporary stay, it's not worth it. Just don't do it.
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LifeIsGood
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Re: US ExPat Pension Working in the UK

Post by LifeIsGood »

Thanks everyone for your excellent insights. That answers a lot of questions. The length of her stay and employment in the UK is very uncertain at this time. As much as I hate to say it, I think she should probably pass on the pension at this time.
Again I appreciate all your input and suggestions.
Valuethinker
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Re: US ExPat Pension Working in the UK

Post by Valuethinker »

LifeIsGood wrote: Sat Jul 03, 2021 7:34 am Thanks everyone for your excellent insights. That answers a lot of questions. The length of her stay and employment in the UK is very uncertain at this time. As much as I hate to say it, I think she should probably pass on the pension at this time.
Again I appreciate all your input and suggestions.
I am pretty sure she does not get a choice?

In that, if you are not part of a company (or organisational) scheme which is more generous, you are in the government default scheme. 5% from your salary, 3% from the employer, 1% from the government. There's a default fund manager (NESTA usually) and their scheme is low cost and sensibly invested (increases your fixed income percentage as you get older).

I am not aware that you can opt out *unless* you are self-employed? HMRC (i.e. IRS) has had a big crackdown on industries like IT and Entertainment where people set up companies to allow themselves to be employed as contractors (thus saving the employer 13.8% National Insurance contributions on *all* remuneration -- there is no cap on employer NI contributions).

In any case she needs to be in touch with HR.

BTW if she is self-employed she should still pay the optional NI contributions. That entitles her to years in the state pension system-- earnings-related pension (roughly, Social Security). That pension is not large, but it is indexed to inflation - my 90-something year old mother in Canada still has to get a lawyer round every couple of years to certify to the UK government that she is, yes, still alive, and therefore receives a widow's pension.

There shouldn't be any tax reporting on this because there's no "fund" there - it's completely Pay As You Go. It's something one is entitled to at state retirement age ie 67 currently.

If she then retires to the USA that is still inflation-indexed. If she retires to Canada or Australia, for example, it is not. Don't ask why, answer makes no sense.
Valuethinker
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Re: US ExPat Pension Working in the UK

Post by Valuethinker »

ivgrivchuck wrote: Sat Jul 03, 2021 1:31 am
LifeIsGood wrote: Fri Jul 02, 2021 6:21 am My granddaughter is a US citizen currently working in London for an undetermined length of time. She’s eligible for a UK pension plan (with a 5% match) but it appears that it will be double taxed by the US/UK when the funds are withdrawn at retirement age. There is also an option to transfer her UK pension to a ‘Qualifying Recognised Overseas Pension Scheme’ (QROPS) as a tax free transfer but there aren’t any current QROPS in the US.
I realize I’m looking for a unicorn but does anyone have any knowledge/experience in this area and could perhaps offer any other options? As things stand it seems to me she would be better off not contributing to the plan.
U.S. treatment of foreign pension plans is outright hostile. To stay in full compliance, she might have to hire a tax specialist to fill out the right forms every year, potentially costing thousands of dollars per year until retiring.

Especially if this is a temporary stay, it's not worth it. Just don't do it.
How hard are these forms to fill out?

I just wonder, because if it is a simple Defined Contribution pension scheme, then there's just a portfolio there, a value which changes every year. As long as we are sure it is not taxable under US-UK tax treaty (and I am no expert, but this seems to be the case) then are these forms so complex that you need an accountant to fill them out? (I ask that question, genuinely, because I am aware that some kinds of tax reporting are just penal).
Valuethinker
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Re: US ExPat Pension Working in the UK

Post by Valuethinker »

https://www.gov.uk/workplace-pensions/i ... ion-scheme

https://www.moneyhelper.org.uk/en/pensi ... ource=tpas#


It looks like you can opt out of workplace pension - every 3 years you have to elect so to do.

If there is a defined benefit pension scheme in place (this is true of public bodies like Civil Service, National Health Service, Local Government, Police & Fire etc) then your granddaughter should almost definitely enrol in the scheme. There shouldn't be any onerous US tax reporting requirements because she does not have a personal portfolio, she just has an entitlement to future benefits. In the UK, those benefits are currently, by law, indexed up to 5% pa inflation and at least 50% spousal benefit.

When you get to 65, those little bits add up.
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Re: US ExPat Pension Working in the UK

Post by TedSwippet »

Valuethinker wrote: Sun Jul 04, 2021 6:42 am How hard are these forms to fill out?

I just wonder, because if it is a simple Defined Contribution pension scheme, then there's just a portfolio there, a value which changes every year. As long as we are sure it is not taxable under US-UK tax treaty (and I am no expert, but this seems to be the case) then are these forms so complex that you need an accountant to fill them out? (I ask that question, genuinely, because I am aware that some kinds of tax reporting are just penal).
It depends (of course!).

The type of pension (defined benefits or defined contribution), the way the pension is managed (SIPP, employer group personal pension, etc), how the pension is funded (personal contributions, employer contributions, or the ratio of funding if both), the pension balance if a defined contribution pension, whether or not you elect the pension into the US/UK tax treaty, what assets you hold in the pension, the country of residency, and even whether or not married, can all play a part in how this gets reported for US tax. Requirements range from minimal and relatively benign (though with potential extreme penalties for non-compliance) to overbearing and draconian (with of course even more extreme penalties for non-compliance).

At one extreme, the barest FBAR (FinCEN form 114) reporting (if above $10k) and FATCA form 8938 reporting (if above $50k to $400k, depending on residency and marital status) annually might suffice; I believe treaty form 8833 has some filing exemptions specifically for pensions, but if not, it's simple to complete anyway. That could come out at less than an hour of very straightforward work annually.

At the other extreme, you have the above, plus tangling with the US's horrible foreign trust forms and annual PFIC forms, things that will consume whole working weeks of a life -- the IRS's own estimated burden for reporting just a single PFIC holding comes to more than 48 man-hours (most pensions not sheltered by treaty would contain more than one PFIC), and over 52 man-hours for form 3520 for foreign trusts. A major drain on your resources, whether you do you own returns or pay someone to do these for you.

Overlaying all of this is that the US/UK treaty is not entirely clear on precisely which UK pensions are covered by treaty. Professionals have disagreed over the interpretation of some areas, particularly when it comes to SIPPs. The IRS never says anything definitive either way; at least, not unless you are prepared to pony up several hundred dollars or more for a 'private letter ruling'. And IRS attempts to 'relax' filing requirements use a typically predictable US-centric and narrow view of pensions that (surprise!) actually excludes many if not most of the non-US pensions they aim to cover.

A US citizen who moves to the UK and plans to stay for life will probably either suck this unpleasantness up or (perhaps more likely) take out UK or other non-US citizenship and then renounce their US citizenship to become free. By contrast, a US citizen who plans to work in the UK for only a short period, perhaps a year or two, and then move away, would likely just avoid the whole thing by staying away from UK pensions, ISAs, and so on. Either way though, for US citizens living outside the US, the US's sociopathic citizenship based taxation policies can force some ugly decisions.
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Re: US ExPat Pension Working in the UK

Post by TedSwippet »

Valuethinker wrote: Sun Jul 04, 2021 6:40 am BTW if she is self-employed she should still pay the optional NI contributions. That entitles her to years in the state pension system-- earnings-related pension (roughly, Social Security). That pension is not large, but it is indexed to inflation - my 90-something year old mother in Canada still has to get a lawyer round every couple of years to certify to the UK government that she is, yes, still alive, and therefore receives a widow's pension.
Worth noting here that the UK and US have a totalization agreement, under which NI (for the UK) and SS tax (for the US) can apply reciprocally, so that UK NI credits from payments made when a UK employee can count as US credits for US SS payments. It also eliminates the potential for SS double-tax.

More here: https://www.ssa.gov/pubs/EN-05-10199.pdf
tubaleiter
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Re: US ExPat Pension Working in the UK

Post by tubaleiter »

LifeIsGood wrote: Fri Jul 02, 2021 6:21 am My granddaughter is a US citizen currently working in London for an undetermined length of time. She’s eligible for a UK pension plan (with a 5% match) but it appears that it will be double taxed by the US/UK when the funds are withdrawn at retirement age. There is also an option to transfer her UK pension to a ‘Qualifying Recognised Overseas Pension Scheme’ (QROPS) as a tax free transfer but there aren’t any current QROPS in the US.
I realize I’m looking for a unicorn but does anyone have any knowledge/experience in this area and could perhaps offer any other options? As things stand it seems to me she would be better off not contributing to the plan.
Short answer: unlikely to be any double tax, and filing isn't too bad as long as the employer contributions are equal to or greater than the employee ones (might get ugly if not, interpretations differ). The return on the employer match is hard to beat (free money!), and the UK tax advantages are significant.

Long answer:

I'm a US citizen working in the UK - I do plan to stay indefinitely, so my experience is mostly from that perspective.

I've filed my UK pension on my US taxes several times. Because it's a pension as recognized by the US/UK tax treaty, there's almost nothing to do - include on FBAR, and decide how you want to treat the contributions (by default, employer and employee contributions are included in taxable income and thus build up a basis in the pension for future withdrawals; the treaty allows them to be excluded from taxable income - in most cases, Foreign Tax Credits mean no US tax is due in the year of contribution anyway, so I elect to include them in my income and just carry forward slightly less FTC, which I may never be able to use anyway). Eventually include in the Form 8938 if the taxpayer has enough foreign assets.

There is an open question as to whether a pension is a foreign trust, from the perspective of the US. The best consensus I've gotten on this is that a workplace pension is fairly certainly not a trust as long as the employer contributions are greater than or equal to the employee contributions. If the employee contributions are the majority, it might be a trust, which triggers Form 3520 and 3520A, just messy and complicated to prepare (information returns - not paying any tax, but a pain to fill out). Different experts have different interpretations at that point.

Also seems pretty clear that a workplace pension is a "pension" under the treaty - that's good news, because it means that PFIC rules don't apply. Likely the only investment options inside a workplace pension will be PFICs!

SIPPs are a different story, since all the contributions come from the "employee" - same question as to whether they're trusts or not, and also a bit of a treaty question as to whether they're pensions and thus protected from PFIC.

The other debated question is how the US taxes the 25% of the pension that the UK considers tax free. This gets into debates about the definition of a "lump sum", etc. Personally, I find the argument more compelling that the 25% tax free does not apply to the US - 100% of the pension is taxable (just like a US Traditional 401k). But if you do the math, for a US citizen living in the UK, the UK tax on the taxable 75% should give you enough FTCs to offset US tax on 100% - so you're still not actually paying US tax (although it's a fairly close call - if US tax rates go up, or there was state tax on top, there could be a little additional tax due). I'm not sure how this works for a US citizen living in the US, though.

Don't forget about the UK tax advantages to a pension - depending on overall income, you could be avoiding up to 62% tax (income in the personal allowance phaseout above £100k, with salary sacrifice). "Worst" case, it's 20% (32% with salary sacrifice), which is certainly nothing to sneeze at.
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Re: US ExPat Pension Working in the UK

Post by halfnine »

TedSwippet wrote: Sun Jul 04, 2021 7:50 am
Valuethinker wrote: Sun Jul 04, 2021 6:40 am BTW if she is self-employed she should still pay the optional NI contributions. That entitles her to years in the state pension system-- earnings-related pension (roughly, Social Security). That pension is not large, but it is indexed to inflation - my 90-something year old mother in Canada still has to get a lawyer round every couple of years to certify to the UK government that she is, yes, still alive, and therefore receives a widow's pension.
Worth noting here that the UK and US have a totalization agreement, under which NI (for the UK) and SS tax (for the US) can apply reciprocally, so that UK NI credits from payments made when a UK employee can count as US credits for US SS payments. It also eliminates the potential for SS double-tax.

More here: https://www.ssa.gov/pubs/EN-05-10199.pdf
I just wanted to add an additional thought on top of what has already been mentioned. Paying optional UK NI might not be cost effective for someone staying a short time in the UK due to the Windfall Elimination Provision (WEP). The credits will unlikely be necessary to eventualy qualify for USA SS which only requires 10 years and the UK pension payment could ultimately be reduced by half and you would still need (10 years?) of service in the UK to receive them. I don't often recommend kicking the can down the road, but if there is a grace period to backpay (a few years?) into the UK system it might be worth holding out payments during that period until she has a greater understanding of how long she plans to stay in the UK. However, that said, I do not know if opting out of UK self employment taxation might then require her to pay USA self employment taxes instead.
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Re: US ExPat Pension Working in the UK

Post by Hyperborea »

Valuethinker wrote: Sun Jul 04, 2021 6:40 am BTW if she is self-employed she should still pay the optional NI contributions. That entitles her to years in the state pension system-- earnings-related pension (roughly, Social Security). That pension is not large, but it is indexed to inflation - my 90-something year old mother in Canada still has to get a lawyer round every couple of years to certify to the UK government that she is, yes, still alive, and therefore receives a widow's pension.
This is an aside to the main conversation, but unfortunately, a UK state pension is not indexed to inflation if a retiree lives in Canada or New Zealand.

https://www.gov.uk/state-pension-if-you ... te-pension
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