Citizens and residents of the US or UK expats who are living in the US are liable to taxation on all of their international income, which include the pensions that they received from the UK.
With these taxation rules, we received a lot of the same questions from our clients circulating about the US taxation on their PCLS. There are grey areas in this matter and in this article, we will briefly break it down for you to make you understand better about whether the US government will tax your 25% PCLS or not.
Before answering your questions, our CEO and Independent Financial Advisor (IFA), Dominic James Murray, explains briefly about the 25% PCLS in the United States. Subscribe to our YouTube channel for more interesting topics that covers the UK Pension Transfer industry, including all updates and best tips you can get from the Pension Transfer Specialist, Cameron James.
What is PCLS?
Before diving into the taxation rules, let’s go from the basics. What is a PCLS? PCLS is a short for Pension Commencement Lump Sum. It is a tax-free benefit that most individuals may obtain when they begin receiving their withdrawn pension benefits. The amount of PCLS is 25% of the entire value of your pension.
Do I Have To Take a PCLS?
You don’t have to take PCLS if you don’t want to. For example, if you wanted to purchase an annuity, you might decide that you would rather have the more excellent annuity value that you could purchase using your whole pension rather than the annuity you could buy with 75% of your pension after taking a PCLS.
Do I Have To Take All of My PCLS at Once?
You won’t usually need to take all of your PCLS at once, in the same way that you don’t normally have to access all of your pension benefits at once. You get the choice to take a PCLS each time you access some new pension benefits.
For example, let’s say your pension was worth £400,000, so you could take up to £100,000 PCLS in total. If you decided to crystallize £200,000 of those benefits, you could take £50,000 PCLS at that point. You could take more PCLS when you choose to crystallize the remaining £200,000.
How Much PCLS Can I Have?
If you have standard PCLS entitlement, the maximum PCLS you can have in total from all of your pensions is 25% of the lifetime allowance. Therefore the maximum you could receive anytime you crystallize funds is 25% of your remaining lifetime allowance.
There is a further restriction: the maximum PCLS you can receive when you crystallize benefits is 25% of the amount you’re crystallizing at that time.
What if My Fund Value Increases After I’ve Taken My PCLS?
Funds in drawdown are crystallized, so there’s no more PCLS entitlement even if the fund value increases. Fund growth will, however, increase the amount which is available to you as taxable income.
I Have a Protected Lifetime Allowance. Can I Have More PCLS?
If you have a form of lifetime allowance protection, you may be entitled to more PCLS. Most of the protections will allow you to take up to 25% of your protected lifetime allowance rather than the standard lifetime allowance. However, other forms of protection may entitle you to a fixed amount of PCLS, which is higher than average, or a lower percentage of each amount you crystallize but a higher overall amount. Our lifetime allowance protection fact sheets explain how each protection affects your PCLS entitlement.
Before 2006 I Had a Pension Which Let Me Have More Than 25% PCLS. Does That Still Apply?
Under pre-2006 pension rules, some people had pensions that allowed them to take more than 25% of the fund value as PCLS. This enhanced PCLS related to the particular pension; an individual who had one may also have other pensions elsewhere with normal PCLS entitlement.
If you had one of these pensions and you are still with the same provider, you should still be able to take your higher PCLS amount. If you have since transferred to a new provider, you will need to have completed a ‘block transfer’ to keep your protected amount. We strongly recommend that you speak to an adviser if you have transferred your pension and are unsure whether this applies.
Can I Delay Taking My PCLS?
Sometimes people may decide to crystallize funds and take PCLS but not want to withdraw it immediately – for example, if they are waiting for an investment to mature in order to free up enough cash to make the payment.
It’s typically possible to delay taking a PCLS; however, the legislation says that you must take it within 12 months of crystallizing your funds. After 12 months, the entitlement is lost. The amount which was going to be paid as PCLS would simply remain in your pension, ready to be crystallized at a later date.
For example, let’s say your pension was worth £450,000, and you want to crystallize £200,000 and take £50,000 PCLS, leaving £250,000 uncrystallized. You ask your provider if you can delay taking the £50,000 PCLS. £150,000 goes into drawdown, and the remaining £300,000 stays as it is, with £250,000 uncrystallized and £50,000 available to take as PCLS. If you don’t take the PCLS within a year, the £50,000 is just treated as uncrystallized funds again. You effectively just crystallized £150,000 without taking PCLS.
I Have Other Questions in My Mind About the 25% PCLS
We strongly suggest that you should speak with a Pension Transfer Specialist or, specifically, to a tax advisor about this. Through speaking with us or tax advisor, you can get a clear picture of PCLS as well as helping you to answer all the questions about the 25% PCLS in your mind. You can start with a free initial consultation with one of our qualified ad experienced IFAs through the button on the right side.