Retiring Abroad: Will Your UK Tax-Free Lump Sum Be Taxed in the US?

Upcoming changes to financial legislation mean many British expats should seriously rethink how and when they access their UK pensions. From April 2027, unused UK pensions are expected to be included in the UK inheritance tax (IHT) net as UK‑situs assets. For long-term expats with sizeable pensions, this could mean a potential 40% tax hit on what’s passed to heirs.

In this episode of Expat Wealth, Richard Taylor – dual UK/US citizen and Chartered Financial Planner – is joined by Chris Hall – International Income Tax & Social Security Specialist at PKF O’Connor Davies – to discuss the upcoming UK IHT changes. They explore the importance of UK pension reporting upon arriving in the US, whether opening a Self-Invested Personal Pension (SIPP) makes sense, and how to design a coordinated retirement income and inheritance strategy.

Richard and Chris take a detailed look at:

IRS pension reporting requirements and how they apply for expats in the US.

Pension Commencement Lump Sums (PCLS) and whether they are truly tax-free for UK expats in America.

UK inheritance tax changes and what they mean for unused UK pensions held by persons living abroad.

Strategic financial planning before, during, and after moving abroad, including retirement and estate considerations.

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Expat Wealth is supported by Plan First Wealth. Plan First Wealth is a Registered Investment Advisor serving fellow expatriates and immigrants living across the US on matters such as retirement planning, investment management, tax planning and non-US asset management.

https://planfirstwealth.com/

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Expat Wealth is affiliated with Plan First Wealth LLC, an SEC registered investment advisor. The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Plan First Wealth does not provide any tax and/or legal advice and strongly recommends that listeners seek their own advice in these areas.

About Richard:

Richard Taylor is a British expat, dual citizen (UK & US). Originally from Bolton, he now lives in Greenwich, CT, where Plan First Wealth has its head office.

As the firm’s leader, Richard launched Taylor & Taylor, now Plan First Wealth, and continues to fuel the firm’s growth. Richard is a Chartered Financial Planner (UK – CII) in addition to holding the IMC (CFA UK) and Series 65 (US – FINRA).

Connect with Richard on LinkedIn

 

Transcript:

Richard:

[00:00:00 – 00:00:18]

Moving from accumulation to decumulation. It is a massive change. And if you don’t have a plan for how you’re going to secure your income in retirement and how you’re going to draw down from your assets and minimize your taxes, there’s so much that can go wrong. It’s so ridiculous. But anyway, don’t get me started. You won’t get me off this, you won’t get me off that.

 

Chris Hall :

[00:00:18 – 00:00:24]

If they did find out then and you hadn’t made any of these declarations, then, yeah, I think you’re in a very difficult position.

 

Richard:

[00:00:25 – 00:01:43]

Welcome to Expat Wealth, a Plan first wealth podcast dedicated to helping ambitious US connected expats thrive. I’m your host, Richard Taylor, and Plan first wealth is the business I founded and run today. And we work with successful expats, immigrants and internationally minded Americans to make the most of their opportunities and avoid the expat landmines. First, a quick disclaimer. While Plan First Wealth LLC is an SEC Registered Investment Advisor, the views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth. Information presented is for educational purposes only. Now, if you aren’t already receiving our regular emails, please go to our website, planfirstwealth.com and sign up there. It’s free and you’ll then be notified every time we drop a new episode and so much more. Okay, let’s get back to this week’s show. My guest today is fellow British expat in America, Chris Hall. Chris is an international income tax and Social Security specialist at the global accountancy firm PKF o’ Connor Davies. And we are here today to talk about UK pensions, an always popular topic and one where there have been some important developments and changes in the last few years. Chris welcome to Expat Wealth.

 

Chris Hall :

[00:01:44 – 00:01:56]

Richard, thank you very much for having me. I appreciate you you invite me along today. Excited to to help unravel some of the mysteries of of UK pensions. So should be a good day.

 

Richard:

[00:01:56 – 00:02:18]

We were meant to be in person during this folks, but we recorded this in December and I succumbed to the flu that I think every. There’s only two or three people left on the planet if I’m with the flu right now, so I succumb to that. So this is my first kind of proper work since I got the flu. So hopefully I’ll hold it together and if you hear my voice, that’s what it. That’s what. Yeah, that’s what you’re picking up Well.

 

Chris Hall :

[00:02:18 – 00:02:24]

I hope you’re feeling better because. Yeah, fingers crossed. I haven’t had it yet, but I’m feeling very lucky compared to everybody else.

 

Richard:

[00:02:25 – 00:02:30]

Right, Chris, so would you mind telling the folks, just introduce yourself, tell them who you are.

 

Chris Hall :

[00:02:31 – 00:03:46]

Yeah, absolutely. So, as you mentioned, Richard, I. As you can tell by the accent, I’m originally from the UK, but I’ve been living here in the US for the past 25 years. Over that time and a little bit before then, I’ve been working in. In what these days we call global mobility. When I started many, many years ago, it was international executive services. But basically what that is, is I just help executives, individuals, families who are moving around the world from an income tax, Social Security perspective. And, you know, a lot of that is driven by both executive moves and then family moves as well. So, you know, as a result of that, a lot of it just being from the uk, I have an affinity and end up have ended up having a lot of UK US clients as you do. You know, I think it’s still a very popular expat route. You know, there’s a lot of US people in the UK and vice versa. So, you know, I think that there are a lot of people here in the US that have, you know, either left assets behind or certainly the pension, which we’re talking about today, you know, so I think it’s very relevant for people who’ve moved over here because it is sort of the. One of the main assets that gets left behind in the uk.

 

Richard:

[00:03:47 – 00:04:45]

Right, totally. And it sounds like we work with a similar kind clientele, so our clients tend to be successful executives. So they were doing. They joined a big multinational company, they rose through the ranks and at some, you know, oftentimes in their early to mid-30s, they get a tap on the shoulder and, hey, do you fancy. Fancy trying your hand in America? And people say yes to that, you know, there for whatever you. This country now. Yeah, well, yeah, right. But there is. This country still is that. Yeah, it’s. It’s America. And people, I think, want to come here and try and make it. And that’s what’s kind of exciting about it. So they move here mid-30s, and by the time you’re in your mid-30s, you’ve got pensions, you’ve often got other stuff, properties, ISAs. Sometimes people come with these things, sometimes people ditch them before they arrive, but you can’t ditch the pension. So almost everyone that we encounter has got a UK pension. So I think it’s really relevant.

 

Chris Hall :

[00:04:47 – 00:06:51]

Yeah, absolutely. And, you know, typically when you first arrive, the UK pension is, is not a troublesome asset to have, if you, like most people have at that point when they’re first moving. A lot of people have the employer pensions, and that gets protected under the treaty. So there’s no kind of immediate taxation concern once you arrive. The only thing that needs to happen upon arrival, pretty much immediately, as soon as you start or become a US tax resident, is it needs to be declared. And that’s a very low threshold, really. You know, if you’re a single person, it’s only $50,000 for foreign asset reporting, but foreign bank account reporting starts at only $10,000, as you know, Richard. So. But as long as you kind of get that introduction, and a lot of executives who are moving will get educated by, you know, their employer may cover somebody. But we do see people moving in who miss that and we have to help tidy them up. It is, it is possible to tidy them up. It’s not great, but it is possible. But as long as you take care of that at the beginning, it’s really not too difficult until you start making changes to your pension, whether that be a SIP transfer, you start taking distributions. And of course, then, as we’ve seen, Richard, what we’re generally talking about there is people who have decided to stay in the US longer term. You know, so they’re either, you know, looking to consolidate, say, a number of different pensions, or they’re, they’re looking to start taking retirement income because obviously in the UK you can start taking that at 55 compared to, you know, a lot of. Well, it’s 59 and a half, technically, on, on a 401k plan. So it does become available before a US equivalent. And so that’s sort of when we, then we start running into more.

 

Richard:

[00:06:53 – 00:06:54]

More.

 

Chris Hall :

[00:06:54 – 00:08:24]

Concern about, from a tax and reporting perspective. But, you know, I think, you know, what, what we’re really looking at today, I think is, is some news that’s come out of the UK that is, is sort of changing strategy a little bit about how we’re gonna. How we’re gonna look at when and how we take out those pensions. You know, there have been some recent developments. We just got through a budget which it didn’t add too much controversy for pensions. We were worried that there would be more significant changes. But the main thing at the moment that we’ve seen is the UK government have announced that from April of 2027, an unused pension would be included as part of the inheritance tax liability. So let me just take a little bit of A step back and explain what that means. So previously if you had an unused pension in the uk, it was not included in your estate for inheritance tax purposes. So what the government have sort of said is that that’s never, that was never really their intention that the pension, they didn’t, they don’t want the super rich, which again is a phrase they’ve kind of used rather than myself just using the pension for inheritance tax purposes when it was really designed to provide pension benefits to individuals.

 

Richard:

[00:08:25 – 00:09:22]

Chris, let’s just jump in a second here. Right, so that’s a great point. They, they, they, it’s a stealth tax. All the, when you’re attacking, when they’re attacking pensions, which they are constantly, it’s a stealth tax. Someone with a million pounds or a million dollars in a pension, I’m, I don’t consider the super rich, but it’s an easy target. But until, well as of right now or, and until April 2027, UK pensions SIPs are not within the UK inheritance tax net. Right. So you’ve got a million dollars, let’s just say we’re in America, let’s talk in dollars. You got a million dollars in your, in your SIP and you pass away. Now what happens, it goes to the beneficiaries under the new regime coming in in April 2027, your million dollars in a UK pension, you pass away. That’s now going to fall within the UK inheritance tax net and that’s what we understand.

 

Chris Hall :

[00:09:24 – 00:11:28]

So one of the things to, to point out there is the UK has just, just changed its inheritance tax rules. It used to be a very complex system of domicile. It used to be there were all sorts of court cases that you could never break your domicile. You had a domicile of birth and then a domicile of choice. But the domicile of choice was very hard to prove. That’s kind of gone away and the rules have changed significantly around that. It’s much more on a time based look now. But what has happened and what’s relevant for people listening to this podcast is that even if you fall outside of that, of that net, as of not being UK domiciled or however they pull you in now, they’re not using the domicile in the same phrase that I learned it. But if you’re outside of the UK inheritance tax net on your worldwide assets, that’s great. But you still get charged inheritance tax on your UK Citus assets. And previously or before April of 2027, that wouldn’t include your pension now we think it is going to do so and the reason I say I think we think it’s going to do so is that this has been announced by the UK government, but we haven’t had a significant amount of clarifying regulations or guidance as to how, how this is really going to be implemented. But what we’re assuming is that a UK pension is a UK Citus asset, which would be in line with the way that we treat other things. So in your example of a million dollars, there are going to be some considerations of lifetime allowances and things in the uk, whether you’re a US citizen, sorry, a UK citizen. Do you get that? And again, those are sort of things that we’re really waiting to see. I, I understand that we will, as, as UK people, we will still get that exemption. But then, you know, if you start thinking about it, if you’ve also got a property in the UK.

 

Richard:

[00:11:28 – 00:11:34]

Chris, you mean the, do you mean the 325, 000 tax exemption?

 

Chris Hall :

[00:11:34 – 00:13:09]

Okay, right, yeah, yeah, yeah, yeah, sorry, yeah, that, so that, that exemption is still available. But again, you know, there is a way again, if somebody’s married that you can double up on that these days. But again, if, if somebody’s just, if somebody’s got here, they have a UK pension, they have a UK property, it, it really isn’t very much in, in terms of the modern world. And, and you know, I mean, you may, as I’m sure you know, Richard, and a lot of people listening, you know, as of as of 1st January 2026, if you’re a US person, by comparison, you get a $15 million exemption in the US so, you know, 3, 350. Sorry, 325,000, 350,000, whatever. It’s going to get adjusted to by the time of 26, you know, compared to 15 million, it’s absolutely nothing. And so, and the way that the treaty works, interestingly enough, is it, it doesn’t eliminate. So just because you’re a US person now, you’re, let’s say you’ve got a US citizenship, if you’ve still got, if you’ve got UK situs assets, as we said, you still get, you still have to pay that tax. It doesn’t, the treaty doesn’t eliminate that responsibility. The UK still has the right to tax those UK Citus assets. Now again, we’re not right down onto the logistics and mechanics of how that works, but it’s. The interesting thing is, and I think from your and I perspective is it really changes the focus of okay, which pension fund do we take first?

 

Richard:

[00:13:09 – 00:14:08]

Right. 100%. But just before we get to that point. So let’s, so let’s just recap here. So you’ve got the million, million pound dollar sip, whatever it is. No other assets in the uk Say you pass away. Now that’s going to form, that’s going to be taxed in the UK under inheritance tax. Let’s assume you get the nil rate ban, £325,000. Anything over and above that is going to get hit with a 40% tax inheritance tax that it previously wasn’t going to get hit with. And then say you have a million dollar property or million dollar home as well. Suddenly now you’ve got a lot of money in, in the UK inheritance tax now. And that’s a big tax hit that I think a lot of people are unaware of. I mean there’s obviously definitely unaware of the pensions things. It’s a, it’s a brand new thing. But I think they’re unaware of how quickly that inheritance tax exposure in the UK can add up just from having two regular UK Scientus assets.

 

Chris Hall :

[00:14:09 – 00:14:26]

Correct. Yeah. And it is, it is interesting because I remember taking my tax exams a thousand years ago when I was still in the UK and the first class on inheritance tax was if any of your clients pay inheritance tax, you as a tax advisor.

 

Richard:

[00:14:28 – 00:14:30]

I’ve heard it called a voluntary tax.

 

Chris Hall :

[00:14:31 – 00:15:00]

Yes, but I think you know, to your point though, and I’ve seen this happen with clients before, it’s people who don’t get the advice and don’t do the planning that can get trapped by this because they just don’t realize it’s there. You know, there’s an assault. Oh, I’ve been gone from the UK forever. I can’t get taxed on anything. It, you know, if they’re the people that can get trapped by this because they just don’t realize.

 

Richard:

[00:15:00 – 00:15:00]

Yeah.

 

Chris Hall :

[00:15:00 – 00:15:13]

And so you know that that’s how it, that’s how it usually occurs is somebody’s just ignorant of, of, of the, the situation that they’ve, they’ve, they’re still in if you like, even though they may have been gone for such a long time.

 

Richard:

[00:15:13 – 00:16:23]

Right. Let’s just take, let’s just like super high level walk through like let’s do what the life of a UK pension in America and then arrival how maybe we would have once treated it when someone starts to draw down versus how maybe this is, this is going to change the calculation. So to our point earlier, our clients tend to Arrive here having worked in the UK for a number of years, they have a UK pension and very often in my experience those UK pensions end up just languishing. They don’t sort them out before they come because no one thinks they’re moving here permanently. Everyone thinks they’re coming here for two years to see how it is and 20 years later they’re still here. So they have these one or more legacy UK pensions to your point, usually not a problem. Hopefully they’re aware of the reporting requirements on day one and if they’re not that could cause a problem down the line. But let’s assume they are. They start reporting them on FBAR and or 80s. I’ve forgotten the number here. You can tell how rusty I am. 80 the F. The Factor form 38,938.

 

Chris Hall :

[00:16:25 – 00:16:41]

I hate naming forms but yeah, that’s the foreign. So what we have is the FBAR form which is the, the bank account form and then the 8938 which we also call the FATCA form. Yeah, those are the two main, main reporting requirements. There are other requirements.

 

Richard:

[00:16:42 – 00:18:08]

People don’t realize that I’ve reported it, you know, I’ve done. Yeah, but you’re not report. You’ve reported it there but, but not here and it’s so, it’s so ridiculous. But anyway, don’t get me started. Yeah, you won’t get me off this, you won’t get me off that. So the hopefully they’ve been reporting it from, from day one but if they’ve not, you know that’s something that we should, that needs and then 20 years later they’re still here. Kids are finishing up at college, they’re thinking about okay, I’ve got a, got a big career Runway here, I need to get serious about retirement and that’s when they often come and find us. And that’s great right because there’s lots we can do. Sometimes it’s a bit frustrating because I look at these like three or four old fashioned employer pensions I think, oh we could have done what we could have done in the last 10 years for those. What we could have done in the last 20 years for those. But anyway, yeah, there’s an opportunity cost I think but yeah, that’s, that’s not the end of the world. There’s still a lot we can do. So they come to us and we help them amalgamate them into a sip, a sip that, that’s welcoming of us residents and allows them to change the currency and then you’ve got to Think about the rollover. So you know, you know, you look to the treaty to make sure that’s okay and then is it okay at the state level? And then now you’re in a sip, which has got more investment options and hopefully it’s got currency options and you might have an additional level of reporting here now 35, 23, 20A perhaps. Yeah, yeah.

 

Chris Hall :

[00:18:08 – 00:18:17]

Generally. Yeah. But it kind of depends on, yeah. The nature of the sip. But mostly we would say, yep, you’ve got that reporting requirement. Yeah.

 

Richard:

[00:18:17 – 00:19:27]

And at that point we can get you into dollars, we can get you invested in something more about, you know, there’s just more option, more better options once you’re in a sip. And then you start to think about drawdown in retirement. And we have the question of the PCLS comes up. So the people are probably familiar with the 25% tax free lump sum, although it doesn’t have to be taken as a lump sum now. And then that often raises questions. So is that tax, we should actually come back to this in a second. But is that pcls, is that tax free in America? Is that federally state level? There’s questions around that. And then there’s the, the remaining, once you’ve taken that, that 20, that PCLS, the remaining pension, that’s taxable in America. But you need to think about getting an NT tax code so you can have it paid tax out in the US and that’s not as simple as you think it is because nothing is. And then we get down to the drawdown strategy and how are we going to take money out of this compared to what we used to done. But before we get to that, let’s just go back to the PCLS issue because that, Chris, this is what if there’s one question we get asked the most? This is it. How is my PCLS going to be treated in America?

 

Chris Hall :

[00:19:27 – 00:19:37]

Yeah. So to give you, to teach you how to be a tax advisor, all you need to respond to any question like that is it depends.

 

Richard:

[00:19:38 – 00:19:42]

Oh, oh, the two words every client loves to hear.

 

Chris Hall :

[00:19:42 – 00:22:19]

Yeah. Well, part of the reason that we get asked the question so much is that if, if you look at it from a firm IRS guidance perspective, there isn’t a solid answer. So it’s a gray area. I’m sure if I was here representing the irs, I would say no, it’s taxable. And I certainly agree with the IRS’s interpretation that a lump sum is taxable. The HMRC came out, I think it was March of 25. I think it was. They changed their they changed their definition within an instruction manual with regard to treaties about what constitutes a, a lump sum. And part of that was saying something over 20% would definitely be a lump sum or sorry, they said over 50% was. Yes, I think it was 20 to 50% was almost certainly or something. I forget the exact language but it was much more clear on what, what is a lump sum. And so, and I’ve been of this position for a long time just taking a flat 25% really in my mind doesn’t work now. The reason I’m being sort of, I’m adding, throwing caveats at you like it’s Christmas time. There’s been a lot of debate about that and certainly, you know, there are some practitioners who would say no, it’s, the lump sum has always been tax free. It should have been always been treated as tax free. I’ve seen IRS council opinion that says no, we never intended to give that benefit to the benefit to a UK person that wasn’t available to a US person. That, that’s a little bit of a disingenuous argument though because then they expect the UK to recognize and respect a Roth and you have this kind of flipping argument of it. But I think certainly the lump sum I find difficult to justify. But then again we start, can look, can start looking at other strategies now with this new guidance of well if you take, if you can still get your 25% out tax free but you’re not taking it as a lump sum so you’re taking it as what is very much defined as periodic payments. So yeah, let’s say you get, you know, you’ve got your million dollar example, let’s say we’re going to take out 50,000 a year. The first 25% would in theory still be tax free in the UK.

 

Richard:

[00:22:19 – 00:22:32]

Chris, let me just, let me just, let me just repeat this back to you for people listening. So the PCLS 25 tax free can be taken as a lump sum. Can be taken as periodic payments.

 

Chris Hall :

[00:22:32 – 00:22:36]

I almost like an income depending on, yeah, depending on the sip apparently it depends.

 

Richard:

[00:22:36 – 00:22:37]

Oh okay.

 

Chris Hall :

[00:22:38 – 00:22:41]

There are some restrictions in some, I don’t think a lot but some.

 

Richard:

[00:22:41 – 00:23:40]

Okay. Yeah the ones, the ones I’m familiar with I don’t think have those restrictions but that’s interesting. It just show the differences even in between contracts. Yeah, there’s, there’s, there’s controversy is probably the wrong word but there’s, there’s massive debate. Everyone has, seems to have a different position and even good cross bought uk, US specific cross border tax Advisors, disagreements. Your position, which I understand because I, you, we’ve shared this with me before and I’ve done the research and I understand how you got there and it makes sense to me. Your position is that the 25, if it’s taken as a lump sum in one go. So in our example, you take $250,000 in one go as PCLS, that is taxable. The IRS are going to tax that and if you try and say otherwise, you’re on shaky ground. But if you take it as a, as a periodic payment, you know, maybe split it out. As to your point, five payments of 50,000 over, I don’t know, one a year, one a quarter.

 

Chris Hall :

[00:23:40 – 00:23:48]

No, as long as it’s periodic and it continues, I think you’ve very much got an argument that it’s just a periodic payment from a pension.

 

Richard:

[00:23:48 – 00:23:49]

Okay.

 

Chris Hall :

[00:23:49 – 00:23:54]

And that pushes it into a different part of the treaty which is more comfortable with being it tax free.

 

Richard:

[00:23:54 – 00:24:22]

Right. Without wanting to get too specific to people we are with, we’re talking in terms of the tax. All of this is governed by the tax treaty with the UK and the US and that’s why it’s ambiguous. So you know, you don’t have this ambiguity with, with U.S. retirement accounts because that’s governed in U. S Law. Now the US Is never going to write a law dealing with how UK Pensions are taxed in America right now. It might go to court.

 

Chris Hall :

[00:24:23 – 00:25:33]

It’s possible. It is possible, Richard, because they have issued, they’ve issued guidance before on foreign plans, particularly around 3,520 and 3,520 a. Reporting requirements. They’ve studiously kind of kept UK pensions in the. You have to have this 3520 reporting requirement because of a lifetime limit, which is frustrating. But for example, on a Canadian RSP which is very much like a SIP because it’s more of a personal plan than a, well, it is a personal plan. It’s not a, not really an employer plan. They’ve said you don’t need to file a 3520 for that. So you know, the IRS is, is potentially able to come out and give us more guidance than they have. When will we get that? Will we get it? We don’t know. But yes, it’s very unlikely that they will come out and give us very clear guidance on this is allowed and this is not, they don’t often do that.

 

Richard:

[00:25:33 – 00:26:39]

Well, they, they, they could come out. Congress aren’t going to write a law on UK Pensions. Right. The, the IRS could come out and say I think they have, we think, we think it’s taxable, but until that’s like as challenged and maybe there’s a precedent is setting in court, it’s, it’s always going to be, there’s always gonna be this back and forth. It’s gonna be the open for interpretation because it’s relying on an interpretation of the treaty. And the treaty, treaties are they, they can only be ambiguous, you know, mostly ambitious. There’s always going to be gray areas in a treaty because you can’t, you can’t go through a line and, and list every single UK account and how it might be taxed in the, in the us it’s intentionally broad. So there’s always going to be this, this, but not all, there’s likely to always be some sort of ambiguity until it’s, until it’s tested in court, if we ever get there. And you know, that might appear frustrating at first glance and sometimes it can be very frustrating. But it also arguably creates an opportunity and it creates an opportunity for bonafide and legitimate interpretations that, that can be backed up.

 

Chris Hall :

[00:26:40 – 00:26:41]

Yeah.

 

Richard:

[00:26:41 – 00:26:59]

So it depends. Frustrates the hell out of people. But looking at it in another lie and it’s better than an out flat out no. So I’ve lost my train of thought. Where was I? I got into the tax region and I’ve lost, I’ve lost where I’m at.

 

Chris Hall :

[00:27:00 – 00:27:09]

Well, I think what you, you know, it’s about, you know, there are options of ways to look at it and it kind of depends how risk averse you are.

 

Richard:

[00:27:10 – 00:27:11]

Oh, yes, yes, absolutely.

 

Chris Hall :

[00:27:11 – 00:28:45]

And obviously it, it depends on how risk averse your tax advisor is, because the tax advisor in the US as most people know, they have to sign the return as well. So they have to be very comfortable that their position is more reasonable than not. So again, I think it’s going to be down there is opportunity now to take pensions in different ways. It looks like there is more flexibility because everything I had seen in the past about taking the 25 lump sum was everybody was talking about it that you just take your 25% and there’s no way to chop and change it. But it seems like there’s some more flexibility on that now. And I think there’s a much more argument is if you were taking, I mean people wouldn’t do this because of the way. But if you took it as chunks of 50,000, as I said, over whether it be quarterly or annually, whatever, that’s a periodic payment and it does fall in a different part of the treaty and is very much an argument that it’s not taxable because it’s not taxable in the uk and the treaty very clearly says if it’s not taxable, you know, it’s not taxable in the U.S. if it wasn’t taxable in the U.K. now again, the IRS might come back and argue, well, we meant a fully tax free pension, which again is when I think it becomes a bit disingenuous because they’re comparing it directly to a Roth and we don’t really have the concept of a Roth in the uk. So it’s not, I don’t think it’s a fair comparison. And why it’s where I think that position is a lot more reasonable for people to, to think about and look at taking.

 

Richard:

[00:28:46 – 00:30:20]

I think you’ve also just brought up another critical piece here. The involvement of a good advisor and their, their, their rationale. It’s particularly important because if you do, if you do take this position, if you do treat it as tax free, you are taking a position, you know, and arguably, certainly if you take it as a lump sum, even if you take it periodically, you’re taking a position kind of against what the IRS have put out there. So I think you want to be on even more high alert to get everything accurate. And why this is super important is because when you take a position, you’re, you’re taking a position under the treaty, then this has to be reported and disclosed correctly. And if it’s not, you can have two problems as far and maybe more you, I mean, I’m not the expert here, but you have two problems. One, one problem is that if you’re not properly disclosed as position, you’ve not shared it with the irs. Arguably you could leave a statute of limitations open on it forever, whereas if you’ve done it properly, hopefully you’ve got a three year statute limitations. Click ticking and if they don’t come back to you in a challenge in that time, they’ve missed the opportunity. The sec, but, but arguably an even bigger, well, I don’t know if much bigger than that. But another issue is they could come to you and say you took this, you took this pcos, you didn’t pay tax and you didn’t tell us about it properly, you are trying to hide from us and then you’re in like, are they going to argue fraud? And even though I’m sure you weren’t, but you don’t want to be having that conversation with the irs.

 

Chris Hall :

[00:30:21 – 00:31:59]

No, no, no, absolutely. And I think that is one of the key things is if you’re going to take, if you’re going to take a position that it’s not taxable, you need to be very comfortable with, all right, what’s the risk? You know, what, what, what am I, what do I need to do to make sure this is properly declared? You know, making sure that you’re making reference to the right treaty section so that they can understand the, that this was a reasonable position to take. If you just don’t report it at all, then it’s. Then if they do come to you on that and they somehow find out, which is a lot easier for them to do today with FATCA rules around the world and things. So if they did find out then and you hadn’t made any of these declarations, then yeah, I think you’re in a very difficult position. And again, where does that lead to is if you’re not reporting the lump sum, are you properly reporting your foreign bank accounts? Was it paid into a foreign bank? You know, can generally you. Everything can. And as you’ve mentioned before, even on today is like one thing leads to another. So the same incident can occur on three or four different firms, three or four different forms. So you have a SIP that pays out a lump sum. You know, you’ve got the foreign trust reporting, you’ve got the foreign bank account reporting, you’ve got the foreign asset reporting. And now you, you know, you got to make sure that all tells the same story. And so doing it sort of ad hoc, if you like, or on your own is, is probably unwise thing to do.

 

Richard:

[00:32:00 – 00:33:53]

Really unwise. Really unwise. Right, so we’re, let’s, let’s, let’s move on from pcls, the hot topic of the day. Yeah, because we didn’t get the states issues. So just everyone, FYI, some states have their own rules. That’s all I’m going to say for this. But most states will follow the federal. Excuse me, but, but, but there are a handful of states, California obviously, that do things their own way and you need to be mindful of that as well. So back to this issue of death, the sunny topic that is death and UK pensions. So historically what we might have done is we’ve got this, got our client into a sip, we’ve agreed with them and the tax advisor how we’re going to treat the PCLs. And very often then we might end up leaving the SIPP for indefinitely almost. And I guess this is why the UK government have cracked down on this. But there’s a rough rule of thumb in financial planning that, that when you get to retirement you leave the assets that are, you know, are not taxed on an annual basis, your qualified accounts. So your IRAs, your 401ks, your SIPs, you kind of leave them to let compounding the joys of com, the wonder of compounding do its thing. So in the early days you draw down from your taxable brokerage accounts and other sources of income, maybe you do some Roth planning in these early years if you can, and then later on you drain from SIPs and IRAs and they’ve had an extra 10, 15 years to compound. Great. And we both think that this now might change the calculus. We now think that maybe there’s an argument to be made for Brits with substantial UK pensions to draw down from their UK pensions first.

 

Chris Hall :

[00:33:54 – 00:36:09]

Yeah. And I think, you know, a part of that would be working, you know, with the likes of us to establish what, what that risk is. You know, you and I could go through and like, okay, what have you got? As I say, we are waiting a little bit on regulation to finalize this position, but certainly, you know, if there’s an opportunity to pull down UK Citus assets, then that’s going to be worthwhile because obviously there is some exposure there. Should something happen to you, the people you intended to get the remainder of your pension are going to suddenly lose 40% of it. And what we’re looking at is do you change your strategy of how you’re pulling it down? Are you able to pull it down in a way that means you don’t have any exposure in the uk? That’s probably going to mean you either have a relatively small UK pension or you have no other UK assets. You know, that’s typically what we, we imagine. But if you have other uk, real property is going to be the main one. If you have that, then let’s look at some planning about what, what are we going to do? You know, that that’s both a tax strategy and a, and a longer term wealth strategy. You know, I think some of it, you know, as, as in many cases with, with, with some inheritance tax, there’s sometimes you just have to say it’s a risk, it’s out there. And I may, maybe I get an extra life insurance policy to cover the liability, the exposure and just adjust that each year as you’re pulling down your pension. There’s a number of different things that you can, you can do. I, I, you know, I’ve seen that in Japan before where it was really, we looked at this inheritance tax issue from every angle we could. And it was a very similar issue. It was about Japanese Citus assets. And it, in the end we just said, look, get, get a life insurance policy. Yeah, we can’t, we can’t just magic away this, this liability. You’re not going to be there for like, I think this person was going to be there for another two years. And we just said, get a life insurance policy till you’ve, you’ve left. Or in this case, get a life insurance policy until you’ve worked down your assets that there is no further liability.

 

Richard:

[00:36:11 – 00:38:26]

I’m actually working on a few cases right now. A couple with, with you. And this is, this is, this is changing. I got a, I’ve got a couple of our really successful clients are one’s on the verge and one’s really starting to think about retirement in the, in the relatively near future. And they’ve got substantial assets, including substantial pensions. And this has changed our plan. We’ve started putting together a tentative income retirement income plan, moving from accumulation to decumulation. It is a massive change, it is a mass. And if you don’t have a plan for how you’re going to secure your income in retirement and how you’re going to draw down from your assets and minimize your taxes, there’s so much that can go wrong. And we, we, we are. Is this. What we’ve talked about today is changing the way we’re approaching the income plan. So we have clients who are, historically, as I said before, we have told them to hold on to their UK pensions and now we’re telling them to drain them first. You know, they are, they’re more expensive than the US counterparts. They are, they’ve got fewer, they’ve got their investment, got loads of investment options, but they’re not as good as they are in the us. There’s additional reporting requirements and therefore additional costs and compliance risks associated with it. And then we have the risk of further legislation changes. In the uk, you’re affected not by what happens in, just what happens in the us, but also by the uk. There’s just, there’s just a lot, there’s just like, downsides. And now with this construction of like, oh, you’re going to get taxed at least once more, maybe twice more. If it’s also income taxable after 75, there’s just like, get rid of this pension first, we think. So we’re telling people, retire, drain this asset first and leave your brokerage account and your IRAs compounding over here. Then we’ll turn to the brokerage account and then we’ll turn to the. To the IRAs, and hopefully we can do some Roth planning in all that. And it’s about, it’s about, you know, it’s the whole thing. It’s the investments, it’s the income strategy and it’s taxes and it’s compliance. It’s making sure people. You don’t want to go into retirement with these compliance issues hanging over you. Unreported PCLs, unreported pensions, you know.

 

Chris Hall :

[00:38:26 – 00:39:37]

No, no, very much so. Very much so. Because, yeah, as we’ve seen, you know, it can be. It can be very expensive if you’ve made a mistake and if you’ve not got the opportunity, you know, if you’re in a point of life where you don’t have the opportunity to make that back at any stage, then it’s really just a cost, you know, and a cost and a waste of money, you know. But I think you’re right. I think, you know, it’s definitely changing the thought process for people here in the us because in the us, from an estate tax perspective, we’re kind of going the other way. It’s like, oh, 15 million. It’s like, okay, you know, if you’re worth More than 15 million, I really do hope you’re prepared to pay for good tax advice. But, you know, there’s a lot of people who are in that gap between, yeah, I’ve got UK exposure, but I don’t really have US exposure. They’re the ones who really need to think about this and like, okay, yeah, my strategy now needs to change. Like, these assets good, these bad. This is where I have exposure. This is where I want to limit it down. And that’s very much changing. As you said, like, okay, this UK piece needs to come down because they’re going in a different direction with their taxation model.

 

Richard:

[00:39:38 – 00:39:41]

Very much so. Very much so. Right, Chris, is there anything else we need to talk about?

 

Chris Hall :

[00:39:41 – 00:39:42]

Pensions or are we.

 

Richard:

[00:39:42 – 00:39:45]

Have we done pensions? Have we done them to death today?

 

Chris Hall :

[00:39:46 – 00:40:14]

You know me, I could come on weekly and bore you about pensions, but, no, I think we’ve done enough today. I think, you know, one. One thing I would say, and I’ll obviously keep you up in the loop, I. I will come back as a guest if you would invite me, but not necessarily always. When we see, when we see those UK regulations coming out, we’ve got a bit more picture. I’ll obviously make sure, you know, and I think it’d be good for your listeners to know Just. Okay, what are the, what are the final position on this? Because we are still, as I say, we’re still waiting.

 

Richard:

[00:40:14 – 00:40:25]

Okay, good. And then. And next time we will do it in person. And we will. We were folks, we were, we were, we were gonna go for a beer afterwards. So definitely, I’m definitely, I’m not there yet. But next time I promise.

 

Chris Hall :

[00:40:26 – 00:40:33]

Yeah, I’ve got to go and sit back at my office now and get back to work, which is unfortunate because I would have preferred lunch and a pint, but there we go.

 

Richard:

[00:40:33 – 00:40:37]

Okay, next time, across my heart right, Chris, where can people find you?

 

Chris Hall :

[00:40:37 – 00:41:07]

They can Find me on LinkedIn is my main social media per outlet, but generally, yeah, my email is seahawlkfod.com Excellent. But yes, I’m rounding about. I’m fairly easy to find. You know, you can get hold of me through Richard if anyone’s got any questions. You know, both Richard and I have been doing this for a long time, so we, we kind of tag teaming on a lot of this because it impacts both sides of the fence for us.

 

Richard:

[00:41:08 – 00:41:12]

Excellent. All right, well, Chris, thank you for coming on Expat wealth and I look forward to doing it again sometime.

 

Chris Hall :

[00:41:12 – 00:41:15]

Great stuff. Thank you for having me, Richard. Always a pleasure.

 

Richard:

[00:41:15 – 00:42:12]

All right folks, that’s another episode of Expat wealth under our belts. Thank you for listening. I appreciate it and I appreciate you. If you’re enjoying the show and would like to support the mission, which is to help ambitious us connected expats to thrive, I’d ask you to subscribe to the POD wherever you listen and also consider leaving a rating and review. This stuff really does matter. Please help us get this information to the people who need it. That is to your fellow expats. Just a quick reminder that this show is brought to you by Plan First Wealth. We are a US based financial planner and wealth manager and we help successful expatriate families make the most of their opportunity and ultimately to retire happier. If you’d like to know more about how we might be able to help you, you can find us on our website or you can look me up on LinkedIn. Do get in touch. We’d love to hear from you. As always, thank you to the podcast guys for their help producing this episode and the entire show. See you next time.