How the US Taxes Your UK Pension
UK expats are often surprised to learn that their UK pension is still subject to tax in the United States. While the pension was earned abroad, the US may still tax income from it, sometimes in unexpected ways. Whether you are already drawing your pension or planning your retirement strategy, it is important to understand how the US views your UK retirement savings.
Not all UK pensions are taxed the same
There are several types of UK pensions, and each may be treated differently under US tax law. Common examples include the UK State Pension, Personal Pensions, SIPPs, and occupational pensions. The US may view some of these as foreign grantor trusts or employer-sponsored plans, depending on how they are structured.
You may be taxed before you draw a penny
Even if you have not started taking money from your UK pension, the IRS may still require you to report growth or contributions in some cases. For example, if your pension is treated as a foreign trust, you may need to file special forms such as Form 3520 and 3520-A. Missing these forms can result in steep penalties, even if no tax is due.
Double taxation is a real risk
While the US-UK tax treaty provides some relief, it does not eliminate double taxation entirely. Without proper coordination, you could find yourself paying tax in the UK on one timeline and again in the US on another. Claiming the right foreign tax credits and understanding timing mismatches is key to avoiding unnecessary tax burdens.
Drawing your pension can trigger tax surprises
Some UK pensions offer lump sum payments or flexible drawdown options. These features may be taxed differently in the US compared to how they are treated in the UK. What is tax-free in one country may be fully taxable in another.
The paperwork is not optional
Beyond your standard tax return, the IRS may require you to report your UK pension on forms like FBAR (FinCEN 114), FATCA (Form 8938), or foreign trust forms mentioned above. These forms are not optional and failing to file them can lead to significant fines, even if you owe no actual tax.
Why proactive planning matters
The rules are complex and depend on your exact pension type, account structure, and personal tax residency. Getting it wrong can lead to penalties, overpayment, or compliance issues. Working with an adviser who understands the cross-border treatment of UK pensions is crucial for peace of mind and long-term planning.
The tax treatment of UK pensions in the U.S. can be complex and depends on factors such as pension type, account structure, and personal tax residency. At BlackPoint Capital Partners, we specialize in cross-border wealth management for clients with UK and U.S. assets. Our fiduciary advisors coordinate with tax professionals to help ensure your retirement income is structured efficiently and aligned with your long-term financial goals.
Some of the content of this communication was provided by third parties of BlackPoint Capital Partners. We have not verified the information contained herein, but we believe the content is reliable. None of this content should be construed as legal, accounting or tax advice. Tax laws are complex and often have highly-individualized requirements, you should seek the advice of a competent tax professional if you have specific tax questions.
