Taking money out
It’s equally important to take advice before drawing money as it is during the accumulation phase. After saving over the course of a career, individuals will want to ensure they make the best use of their funds in retirement planning. To do this effectively, they will need to determine the taxable amount of each distribution, the sourcing and character of the distribution, and any offsetting tax credits. They also need to know how to report a UK pension commencement tax-free lump sum and whether amounts tax-exempt in the UK will also be free of tax in the US.
Reporting
Individuals may need to report the pension on form 8938, FINCEN 114 and in some cases form 3520 (in the case of SIPP’s formed under a deed of Trust).The US reporting along the way is extensive and has severe potential penalties of US$10,000 per form or more. In some cases, such as where a non-employer trust is involved (as is typically the case for a SIPP), penalties may be US$10,000 or up to 5% of the pension’s value, whichever is higher. These punitive penalties exist even when there is no unreported income.
Throughout the tax reporting cycle, taxpayers will need to be able to identify how to report pensions on their tax return on various forms: form 8938, FinCEN form 114 (known as the FBAR), and, if any trust disclosures are needed, on forms 3520 and 3520-A. It may also be necessary if filing a state return or planning a move.
Advice is particularly important when considering inheritance. If structured correctly, a UK pension plan can be free from UK inheritance tax and offer favourable income tax treatment for distributions to beneficiaries. The same is unlikely to be true for US estate tax, and the issues need careful consideration. Taxpayers expecting any residual UK pension funds to be left for US beneficiaries should consider the tax treatment of plan distributions as part of a wider review of their estate planning.