401k And The UK Pension Lifetime Allowance

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mrploppy
Posts: 44
Joined: Thu May 04, 2017 5:20 pm

401k And The UK Pension Lifetime Allowance

Post by mrploppy »

Not sure that this is the correct forum for this question but here goes. I'm a UK citizen and UK resident with a fairly large 401k pot leftover from working in the USA. I started taking payments from the 401k a couple of years ago. I also have an old UK company pension (workplace? occupational? - not sure what the correct term is) which I could take at any point. I've come across the term LTA before but now I'm starting to pay attention because if I want to take my UK company pension I have to agree to some statements with regard to LTA. I've read as much as I can but can't make head nor tail of the LTA rules. I understand that there's a threshold of £1m or thereabouts (round numbers) but I have no idea what this represents or what contributes to it. What I'm most uncertain about is whether my 401k needs to be taken into account - and even then, it's not clear whether it's the value of the pot (at which point?) or the contributions made to it, or what. The fact that a 401k provides no guarantee of income over the long term (due to stockmarket fluctuations) suggests to me that using its value at a certain point could be very misleading but also unfair. Or is the LTA trying to limit the amount of tax deferred contributions someone can make to a "pension" fund? And where does the year 2006 come into it? If anyone could explain all this in simple terms I'd be most grateful.
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: 401k And The UK Pension Lifetime Allowance

Post by TedSwippet »

mrploppy wrote: Sat Jan 11, 2020 9:05 amI understand that there's a threshold of £1m or thereabouts (round numbers) but I have no idea what this represents or what contributes to it.
For a 'defined contributions' pension, such as a SIPP or personal pension, it's simply the pension balance(s). For a 'defined benefits' (final salary) pension, more complicated, but something like 20x annual payouts plus any initial tax free lump sum (but do check this if you have a DB pension -- I don't, so I don't pay full attention to these).
mrploppy wrote: Sat Jan 11, 2020 9:05 amWhat I'm most uncertain about is whether my 401k needs to be taken into account ...
Almost certainly not. The LTA only applies to 'UK tax relieved contributions'. Your 401k isn't included in LTA calculations if your contributions were made while a non-UK tax resident, then. From the horse's mouth:
You may be liable to the lifetime allowance charge if you’re a member of an overseas pension scheme that’s not registered in the UK and you have UK tax-relieved funds under the scheme.
mrploppy wrote: Sat Jan 11, 2020 9:05 amOr is the LTA trying to limit the amount of tax deferred contributions someone can make to a "pension" fund? And where does the year 2006 come into it? If anyone could explain all this in simple terms I'd be most grateful.
The LTA applies to the total balance in UK pensions (excluding some foreign ones, as mentioned above). A person might make modest pension contributions, but be hit by it due to good investment selection or performance. The LTA's aim might be to try to limit tax deferred contributions, but its effect is far more pernicious and corrosive.

2006 is the year when this whole regime came into existence. Known in the trade as 'pensions A-day'. Touted by the government of the time as "simplification", but whether or not it really was, it's been complexificated by virtually every budget since, resulting in the current dog's dinner.
Topic Author
mrploppy
Posts: 44
Joined: Thu May 04, 2017 5:20 pm

Re: 401k And The UK Pension Lifetime Allowance

Post by mrploppy »

Cheers for that, I shall rest easy. I was secretly hoping you were watching, because I knew I'd get a comprehensive answer. I have to say, I find the whole concept rather strange. It's like they didn't think it through.
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: 401k And The UK Pension Lifetime Allowance

Post by Valuethinker »

mrploppy wrote: Sat Jan 11, 2020 9:44 am Cheers for that, I shall rest easy. I was secretly hoping you were watching, because I knew I'd get a comprehensive answer. I have to say, I find the whole concept rather strange. It's like they didn't think it through.
They thought it through very carefully.

The tax exemption on pension contributions costs the Chancellor c 28 billion a year. The majority of that accrues to higher rate and top rate taxpayers. It is a regressive tax expenditure.

However ending the allowance or reducing it to only the 20% rate of taxation would be politically very unpopular. Especially so with opinion formers in the South East, all of whom make more than £42k a year. When it was mooted after 2010 there was a backbencher rebellion.

There is also an equity issue because higher rate taxpayers on civil service, justice and NHS pension schemes would still in effect be getting the higher rate subsidy because their pensions are Defined Benefit.

So the solution successive Chsncellors have adopted, in particular George Osborne, has been to lower the cap. That is in effect a massive tax rise, to 55% on the excess. Already that is raising several hundred million pa for the Treasury.

The average middle class professional has mo idea his or her income in retirement has just been slashed. 1 million pounds buys you a c 23k pa pension, index linked, at age 65. Not riches.

And because of the 20x formula, those in Defoned Benefit schemes are also relatively advantaged and so less likely to squawk

Welcome to the world of stealth tax rises. As long as the Daily Mail does not yell too loudly expect more of these.
midfieldgeneral
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Joined: Sun Sep 06, 2020 6:43 pm

Re: 401k And The UK Pension Lifetime Allowance

Post by midfieldgeneral »

I have a similar question. I am a UK citizen and a US resident. I have old defined pension plan and defined contribution plan in the UK that add up to an LTA of 27%. I also have a 401k pot in the US and a defined benefit plan in the US. Do the 401k pot and US defined benefit plan need to be taken into account for the LTA? Thank you.
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: 401k And The UK Pension Lifetime Allowance

Post by TedSwippet »

Welcome.
midfieldgeneral wrote: Sun Sep 06, 2020 6:58 pm I have a similar question. I am a UK citizen and a US resident. I have old defined pension plan and defined contribution plan in the UK that add up to an LTA of 27%. I also have a 401k pot in the US and a defined benefit plan in the US. Do the 401k pot and US defined benefit plan need to be taken into account for the LTA?
Based on similar reasoning to above, no. Your 401k and US DB plan do no count against the LTA, provided that they do not contain any 'UK tax relieved' contributions.

If you will be a US resident when you draw on these UK pensions, check the US/UK tax treaty carefully for details. The treaty reserves taxing rights to country of residence, but with the exception of 'lump sums'. Unfortunately, it never defines 'lump sums', leading to confusion (the US and UK use these terms in loose and somewhat different ways).

Also, there is a question-mark over whether the UK's 25% tax free from pensions is taxable to a US resident or US citizen. Different people have come to different conclusions on this, with (of course) nothing at all solid from the IRS to go on. If you Google around, you should be able to find these various interpretations of bits of the treaty.
midfieldgeneral
Posts: 2
Joined: Sun Sep 06, 2020 6:43 pm

Re: 401k And The UK Pension Lifetime Allowance

Post by midfieldgeneral »

Thank you for the response. Based on your previous answer I hoped that was the case but I wanted to check. Regarding the other tax implications I had already come to the conclusion that there are different interpretations of the law and treaty. I have engaged an international tax adviser to give me their interpretation in writing. Hopefully that will give me something to fall back on if the IRS comes after me!
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