Unless you are of age to receive distributions from your UK pension, your UK pensions will continue to be reported on the foreign informational forms such as Form 8938 (Statement of Specified Foreign Financial Assets) and Form 3520-A/3520 (if the pension is classified as a Foreign Grantor Trust).
However, after many years of being in the UK, many of our clients have accumulated some tax-free basis in their pensions. This is because, most of the time, employer contributions are taxable, employee contributions are not deductible, and growth (of earnings and accretions) within the pensions can be taxable (unless treaty relief is claimed). Therefore, moving back to the US and receiving pension distributions could be tax efficient.
Key tax consideration
It’s important to distinguish between lump sum distributions and regular periodic pension payments. Lump sums are still taxable in the UK under the US/UK tax treaty, except for the 25% tax-free lump sum amount, which is tax-free in both the US and the UK. Periodic payment amounts are taxable in the US, although tax-free basis in the pension could mean the tax liability can be reduced. Tax-free basis is a Federal Income Tax rule and may not necessarily follow to a State Income Tax return. In particular, States like California will tax in full because they don’t necessarily follow the Federal Income Tax return.
Back in the 2010/11 UK tax year, our client Melina made the maximum annual contribution to a Self-Invested Personal Pension (SIPP) of £212,500, for which basic tax relief of 20% was given. The relief was given within the SIPP, with the £212,500 contribution being grossed-up to £255,000. The US did not give relief for such a contribution, therefore the SIPP generated tax-free basis for US purposes. However, the income contributed to the SIPP was fully absorbed by foreign tax credits in that year and this had accumulated over the previous 10 years. This meant there was no US tax liability, even though no relief was given in the US on the pension contribution.
Melina then retired back in the US and the amount already taxed on the US return of £255,000 will not be taxed again for US tax purposes (ignoring State tax issues). Under the current US/UK tax treaty, pensions are only taxable in the country of residence, so UK tax will not be payable on any periodic payments from the plan. For Melina, this meant that there was a permanent deferment of US and UK tax on £255,000 worth of income, upon moving to the US.