When pension benefits are built up in the UK, HMRC allows you to take a PCLS (Personal Commencement Lump Sum) when you reach retirement. The current pension access age in the UK is 55. This blog is perfect for those expats who have a UK pension, but are in the US and want to potentially draw on their pension.
The tax-free element is limited to 25% of your lifetime allowance, which is £1,073,100 for the 2021/22 tax year. Each time you crystallise some of your pension, 25% of it will be tax-free (up to the LTA limit). The remaining 75% moves into an uncrystallised fund – any drawdowns from this element are taxable at your marginal rate.
This is useful as it allows you to phase your drawdown whilst remaining invested.
What if I take my 25% PCLS in the USA?
Unfortunately, the 25% PCLS is not tax-free in the US. The IRS simply view it as a pension payment and it is taxed according to your marginal income tax rate.
The UK offer these pension benefits to help ease reliance on state provisions in retirement – from a US perspective, the pension wasn’t built up there so they don’t want to provide any tax relief on it.
Generally, therefore, it’s not the most tax-efficient way to draw on your UK pension. An alternative solution, and the one we tend to recommend, is applying for your Nil Tax (NT) code to have the income paid out gross.
However, to make sure this is right for you, please see a qualified financial advisor.
How does the Nil Tax (NT) code work?
In the United Kingdom, pension income is taxed through PAYE (your tax code). The amount of tax you pay each month depends on the tax code you have in place which is based on your income level. If you have an NT code in place, it essentially instructs your pension scheme to pay out any income free of UK tax.
You can apply for the NT code if you are a non-UK resident. You just need to declare the income in your country of residence.
How can you apply for a Nil Tax (NT) code?
Firstly, you would need to create a government gateway account online through the gov website. Once this is created, you will be able to complete the P85.
If you have any questions or are looking for financial advice, please email me at info@investmentsforexpats.com.
