Sign up to The American magazine's newsletters (below) to receive more regular news, articles and updates on America in the UK.
Social Security and State Pension
Andrea Solana of MASECO Private Wealth looks at US Social Security and UK State Pension entitlements
In this edition of our series of financial articles we focus on understanding the US Social Security and UK State Pension entitlements for individuals who have spent parts of their careers in both the US and the UK.
US Social Security and UK State Pension benefits often form a cornerstone of an individual’s retirement planning strategy providing a source of income that will supplement other retirement savings. The ability to receive such benefits generally depends on working and having earned income in the requisite countries for long enough to qualify.
Under the UK system, anyone who reaches State Pension Age after 6 April 2016 needs to qualify for benefits under the New State Pension rules. Under the New State Pension, an individual needs 10 qualifying years to receive a benefit. A qualifying year is generally one in which you were employed and paying National Insurance Contributions, received National Insurance Credits due to unemployment or illness, or paid voluntary National Insurance Contributions. The full benefit currently amounts to £164.35 per week (or £8,546.20 per year) but the ultimate amount you receive is based on your National Insurance record.
For US Social Security, an individual must generally be employed in a job where Social Security tax has been paid in an amount that allows the individual to earn at least 40 credits. A maximum of 4 credits can be earned each year, so this equates to an individual paying Social Security taxes over at least 10 years of employment. The amount of projected benefit entitlement is based on a formula which indexes your earnings during the 35 years in which you had the highest earnings. In the instance that you have less than 35 qualifying years then the projected benefit is based on the number of years between 10 and 35 that you have paid into the program.
A Totalization Agreement between the US and the UK can provide additional credits to reach qualification for benefits.
If you find that you do not meet the minimum requirements to qualify for a Social Security benefit in either the US or the UK, you may still be able to obtain a Social Security benefit as there is an agreement in place between the US and the UK called a Totalization Agreement which eliminates the requirement to pay Social Security tax in both countries on the same income source and provides for a gap fill to benefit entitlement in the situation where individuals have spent part of their career working in the US and part in the UK. In the instance where qualifying time periods of participation in each of the US and UK Social Security systems can be combined to then subsequently result in an entitlement, then the US and the UK will each pay their pro-rata share in the benefit entitlement being paid.
You should be aware that the Windfall Elimination Provision (WEP) can alter your projected US Social Security benefit entitlement.
Whilst an individual can be entitled to receive both a US Social Security benefit and a UK State Pension benefit, this does not mean that the projected benefit entitlement outlined on their US Social Security Statement will be the amount they receive. The Social Security Administration applies something called the Windfall Elimination Provision (WEP) to an individual’s US Social Security benefits if they worked in a job where Social Security taxes were not required to be paid and they have also earned a pension from that job. In this instance, the projected benefits can be recalculated and reduced by up to 50% of the pension benefit you earned from income in which you didn’t pay Social Security taxes. Once an individual has more than 20 years of earnings where you have paid Social Security taxes, the reduction of benefits becomes smaller and if you have more than 30 years of credits then the WEP doesn’t apply. It is important for you to understand how the WEP may impact your total projected benefits especially if the income stream will form part of the income that is relied upon to meet your retirement needs.
Social Security benefits can be difficult to navigate for expat individuals. You should start planning early to understand what your benefits may look like and how they may be impacted by the time spent in different countries. Reviewing this in the context of your broader Wealth Plan will help ensure that you are being prudent in your planning strategies and should prevent any unintended surprises at retirement.
If you would like a full copy of MASECO’s ‘39 Steps to Smart Living in the UK’ please visit www.masecoprivatewealth.com/the39steps or contact us at firstname.lastname@example.org. All investments involve risk and may lose value. The value of investments can go down depending upon market conditions and you may not get back the original amount invested. Your capital is always at risk. Currency exchange rates may cause the value of an investment and/or a portfolio to go up or down.