How UK Pensions Are Taxed in the United States

Core Principle: U.S. Citizens and Residents Are Taxed on Worldwide Income

Regardless of where a pension is located, the United States generally taxes worldwide income, including:

• pension distributions,
• annuity payments,
• lump sums,
• investment income,
• foreign retirement income.

A UK pension—even though it sits overseas—is treated as part of the individual’s worldwide income for U.S. tax purposes when withdrawals occur.

UK pensions remain UK pensions

They do not become U.S. retirement accounts.

Withdrawals are generally U.S.-taxable

U.S. law governs U.S. taxation.

The U.S.–UK Treaty may influence outcomes

The treaty determines how pension distributions may be taxed.

Each pension type requires separate analysis.

Types of UK Pensions Commonly Held by U.S. Residents

Understanding the structure of a UK pension helps clarify U.S. tax treatment.

1. Defined Contribution Pensions (Workplace DC Schemes)

Examples:

• Auto-enrolment plans
• Group personal pensions
• Standard employer DC plans
• NEST
• Stakeholder pensions

These accumulate investment value based on contributions and growth.

2. SIPPs (Self-Invested Personal Pensions)

A SIPP is a UK personal pension with a broad investment menu.

SIPPs may hold:

• UK mutual funds
• UCITS ETFs
• unit trusts
• global funds
• cash
• discretionary portfolios
• certain alternative investments (scheme dependent)

Some SIPP investments may raise PFIC issues under U.S. rules (discussed later).

3. Defined Benefit (DB) / Final Salary Schemes

These provide:

• guaranteed income in retirement,
• formula-based benefits (i.e., years of service and salary),
• inflation-linked increases (scheme dependent).

DB schemes require very careful analysis due to valuation and taxation rules.

4. UK State Pension

A government-provided pension based on National Insurance contributions.

Different treaty provisions apply to state benefits.

Each pension type interacts differently with U.S. law.

Does the U.S.–UK Tax Treaty Apply to UK Pensions?

Yes. The U.S.–UK Income Tax Treaty includes pension provisions that may be relevant.

Treaty Article 17 (general themes only):

• Provides rules on which country may tax certain types of pension income
• Distinguishes between government service pensions and private pensions
• Applies different rules depending on residency

High-level points (general, educational only):

• Private pension distributions are generally taxable only in the country of residence
• Government pensions may be taxed in the source country
• Social Security-type benefits have separate treatment

Important:
Application of treaty rules depends on:

• residency status
• pension type
• U.S. and UK domestic tax law
• whether the individual elects treaty treatment

How the U.S. Generally Taxes UK Pension Distributions

1. Periodic pension income (annuity-type payments)

Generally treated as ordinary income under U.S. tax rules.

2. Lump-sum withdrawals

U.S. tax applies based on:

• U.S. rules for foreign pension distributions
• treaty interpretation
• local UK rules
• residency at the time of withdrawal

Some lump sums may be taxed differently in the UK and U.S.

3. SIPP withdrawals

Treated as foreign pension income under U.S. law.

The U.S. generally taxes:

• the taxable portion of distributions
• at ordinary income tax rates
• depending on individual circumstances

4. Defined Benefit scheme payouts

Treated as pension income when paid to a U.S. resident.

Taxation depends on:

• periodic income vs lump sum
• treaty treatment
• residency
• whether any portion is considered taxable in the UK

These interactions vary case by case.

U.S. Taxation of UK Pensions While You Are Still Living in the UK

When a U.S. person resides in the UK:

• the U.S.–UK Treaty contains provisions that may govern contributions and growth
• certain employer contributions may be treated differently
• certain deductions may apply depending on circumstances
• PFIC rules may apply to investment holdings inside pensions
• treaty eligibility depends on treaty residence requirements

General themes (not advice):

• Employer contributions may be treated differently for U.S. tax purposes
• Pension growth inside a UK scheme may not be taxed annually under certain conditions
• Specific interpretations depend on tax guidance

U.S. Taxation of the UK State Pension

The U.S. generally taxes UK State Pension payments

They are treated similarly to foreign Social Security-type benefits.

The treaty governs whether the UK may tax

Depending on residency and treaty articles.

Benefits are reportable as income in the U.S.

Taxation depends on individual filing circumstances.

PFIC Considerations Inside UK Pensions

Some UK pension investments may involve:

• non-U.S.-domiciled mutual funds
• UCITS ETFs
• OEICs
• unit trusts

Under U.S. tax rules, these may fall under the Passive Foreign Investment Company (PFIC) regime unless exempted through treaty interpretation or depending on how the structure is viewed for U.S. purposes.

Key points (high-level, neutral):

• PFIC rules create specific tax and reporting considerations
• PFIC reporting may apply depending on structure
• Treatment depends on investment type and U.S. tax interpretation
• This varies case by case

UK pensions often require careful analysis around PFIC exposure.

UK Pension Contributions While Living in the U.S.

Contributions into UK pensions while living in the U.S. depend on:

• UK pension rules,
• whether contributions are allowed for non-UK residents,
• whether the individual has UK earnings,
• the type of pension,
• UK tax relief eligibility rules.

From the U.S. side:

• Contributions may not receive U.S. tax deductions
• Contributions may not count as U.S.-qualified plan contributions
• Treaty rules may apply in certain circumstances

Eligibility depends heavily on personal tax and residency circumstances.

Currency Considerations (GBP ⇄ USD)

UK pensions are generally denominated in GBP.

U.S. residents may:

• spend in USD,
• retire in USD,
• convert currencies at retirement,
• face GBP/USD fluctuations over time.

Retirement planning often involves evaluating:

• future retirement location,
• future currency needs,
• FX exposure,
• distribution timing,
• cash flow requirements.

U.S. State Tax Considerations

Some U.S. states:

• tax foreign pension income
• follow different rules from federal tax law
• may not recognise treaty provisions

Examples (general themes only):

• California does not always apply treaties in the same manner as federal law
• States have their own tax rules

State residency may significantly impact taxation.

UK Pensions and Required Minimum Distributions (RMDs)

UK pensions do not follow U.S. RMD rules.

U.S. rules apply only to:

• 401(k)s
• Traditional IRAs
• certain U.S. retirement plans

UK pensions follow UK distribution rules, separate from U.S. RMD obligations.

However, U.S. tax reporting applies when income is distributed.

Can a UK Pension Be Moved Into a U.S. Retirement Account?

Short answer: No.

UK pensions cannot be transferred into:

• 401(k)s
• Traditional IRAs
• Roth IRAs
• SEP IRAs
• SIMPLE IRAs

Nor can U.S. retirement plans transfer directly into UK pensions.

Cross-border pension transfers are not permitted under current law.

Social Security vs UK State Pension Interactions

The U.S.–UK Totalization Agreement may help individuals:

• combine work credits,
• avoid double social security contributions,
• coordinate long-term eligibility.

It does not allow pension transfers.

Common Situations for UK Pensions in the U.S. (Illustrative Examples Only)

These examples are hypothetical and do not represent actual clients or outcomes.

Example 1 - UK Professional Relocating to the U.S.

Profile:

• holds UK DC and SIPP
• works in the U.S.
• wants to understand taxation

General considerations:

• U.S. taxes distributions
• UK may or may not tax depending on residency
• treaty rules may apply

Example 2 - American Returning to the U.S. After Working in the UK

Profile:

• contributed to UK workplace pension
• now a U.S. resident
• future retirement location unclear

General considerations:

• U.S. taxation applies to withdrawals
• FX exposure for GBP pension
• planning may depend on future residency

Example 3 - UK DB Pension Holder in the U.S.

Profile:

• final salary scheme
• considering annuity vs lump sum

General considerations:

• lump sum vs periodic tax treatment differs
• treaty may influence taxation
• currency planning matters

Practical Checklist for Persons With UK Pensions in the U.S.

How Skybound Wealth USA Supports Individuals

Skybound Wealth USA assists individuals with:

• understanding U.S. tax considerations for UK pensions,
• reviewing long-term cross-border retirement planning,
• modelling multi-currency income scenarios,
• PFIC-aware investment planning,
• coordinating planning with tax professionals,
• aligning UK pension income with U.S. retirement strategies,
• evaluating future residency considerations,
• supporting portfolio planning across GBP and USD.

Conflict Disclosure:
Skybound Wealth USA may receive compensation when individuals choose advisory services involving assets under management.
Individuals should evaluate all options before making decisions.

Next Steps

If you would like to review how your UK pensions interact with U.S. retirement planning, you may schedule a discussion with Skybound Wealth USA.