Final Salary Pension - Tax on Lump Sum

I'm a US citizen coming up to retirement in the UK, having worked in a UK University all my working life.  I'm fortunate to be in the University Superannuation Scheme, which will be a final salary scheme until the end of March 2016.  The final salary scheme pays out a monthly pension and a one-off lump sum which is tax-free in the UK, but apparently is liable for US tax.  Having read many IRS publications, followed this forum for a while and worked through various tax scenarios, it seems that the only way to avoid paying US tax on the lump sum is to convert it to monthly pension payments (then claim foreign tax credits).  Does anyone know any other way to deal with this problem?

As a member of the Universities Superannuation Scheme you are required under Internal Revenue Code Section 402(b) to have included the value of the vested accrued benefit in income each year. Assuming you have done so, you will have basis in the plan.

You may well also have excess foreign tax credits from up to the past 10 years, especially if you have been prudent and not elected to claim the foreign earned income exclusion. 

What have you reported to date on your annual US income tax returns and Forms 8938?

Lump sum pension payments from a UK pension to a US citizen  are US taxable, however, is an amount that is less than the entire  pension value a lump sum as far as the IRS understands it? Also if you were to spread out the distribution of the UK tax free amount over a number of years would that qualify it to be treated as systematic payments and so be tax free in the US as well as the UK.

If you have declared the pension contributions as income over the years and paid tax on them then the principal amount in the pension will be US tax free on withdrawal and you'll only have to pay tax on any gains.... For a final salary pension you'll have to do some annuity calculations to work that out. Alternatively you might have just used the treaty to exclude the pension contributions from your US taxable income and so you'll be liable to US income tax on all your pension income. This is the position most people find themselves in either by design or through doing nothing.


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The Treaty has only allowed one to exclude employer contributions from 2004, so if the returns were accurate until 2003 there will be some basis until at least 2003.

The Treaty has only allowed one to exclude employer contributions from 2004, so if the returns were accurate until 2003 there will be some basis until at least 2003.

Of course, I missed that, thanks!

Before 2004, I wonder how many US citizens in the OP's situation declared the UK pension contributions as income on the 1040 or if they just assumed that they were tax deferred in the US as well. If they assumed tax deferral, and given that it's now 2016, how would they treat the pension income?