What to Know Before Accessing Your UK Pension Abroad
If you are a UK expat living in the United States and planning to access your pension, it is important to understand how withdrawals may be taxed and reported. Even if you are not transferring your pension, simply drawing income can trigger US tax obligations and paperwork you may not expect.
Withdrawals may be taxed differently in each country
The UK may tax some or all of your pension income at source. The United States may then treat that same income as taxable again, unless the appropriate treaty provisions or foreign tax credits are applied. This mismatch can catch people off guard.
Currency conversion can complicate reporting
If you receive pension income in pounds, you will need to report it in US dollars using IRS-approved conversion methods. Fluctuations in the exchange rate may affect how much taxable income is reported in the United States each year.
Lump sums are not always tax-free in the US
A pension commencement lump sum, which may be partially or fully tax-free in the UK, is generally not tax-free in the United States. You could owe tax on the entire amount unless specific treaty relief is claimed on your US return.
You may need to report more than just income
If your pension is held in a UK-based financial institution, it may need to be reported on the FBAR (FinCEN 114) or FATCA (Form 8938) if the total value exceeds US thresholds. This applies even if you are not currently taking distributions.
IRS forms for foreign pensions can be complex
Depending on how the IRS classifies your pension, you may be required to file additional forms such as Form 3520 or 8621. These forms carry their own penalties for non-filing, even if no income tax is due.
Careful timing can help reduce your tax bill
It is worth planning the timing of your withdrawals to manage the tax impact. For example, waiting until you fall into a lower income bracket or coordinating withdrawals with your US retirement income strategy can help reduce unnecessary tax.
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.
