Excellent white paper on SIPPS

Here is a white paper on SIPPS and their implications for US citizens

http://masecofinancial.com/pdf/sipps.pdf

Here is aparagraph from the linked article that addresses that taxation of SIPPs. As you can see you have options and probably need a professional to support a particular position. The two options are relevant to any UK retirement account, but it's far more certain that option 2) would be a valid approach for traditional employer sponsored defined benefit final salary pensions. Which approach you take will also be influenced by your long term tax planning, and your current tax bracket and the bracket you predict you will be in when you retire.

SIPP growth
From a UK perspective, during your working life your contributions receive tax relief and build up a
pension fund which should also benefit from the growth in the investment portfolio over time.
For American tax payers it is not that simple and there are a few different possibilities:
1) Some of the tax advisors we have spoken with suggest that the SIPP is treated by the IRS as a
Foreign Grantor Trust. If this is the case, then the growth is taxable in the same way any
other of your investment accounts would be and subject to Long Term Capital Gains, Short
Term Capital Gains, Dividend, Income tax rate, etc. If so, you acquire basis not only on your
contributions but also on the growth when you come to make a distribution. For many
people it is more helpful to pay a lower rate of tax annually (such as Long Term Capital Gains
tax or Dividend tax rates which are currently 15%) as opposed to deferring the growth until it
is distributed and paying Income tax (currently as high as 35%). This option would require an
additional annual filing on your tax return (form 3520) and your financial advisor would need
to file an SS4 form to get the SIPP an EIN number so that the IRS can keep track of the
Foreign Grantor Trust/SIPP. If you are subject to this scenario, it is important to avoid
investing in non-US registered mutual funds or other collectives as these are Passive Foreign
Investment Companies (PFICs) and will be taxed inefficiently from a US perspective. For
most of our clients, we recommend using a SIPP Trustee and Financial Advisor who is familiar
with this kind of SIPP and investing in non-regulated collective investments (such as US
mutual funds, ETFs, Hedge Funds, etc.). Investing a SIPP in a Deferred Variable Annuities
(DVA) may make sense for investors, particularly those who are very young or those who will
be in a lower tax bracket at retirement. In general, due to the additional cost and illiquidity
characteristics of a DVA, a young investor would need to maintain above average rates of
return for many decades for this option to be cost effective.
2) Other tax advisors suggest the SIPP will be treated as a Foreign Pension and the growth (not the contribution if FTCs are used) is taxed at the investor’s highest income tax rate when a distribution is made. If an investor expects to be in a lower tax bracket when a distribution is made, then this possibility may be more attractive. Under this scenario, investors can invest in PFICs, US Mutual Funds, Offshore Funds, etc.
Investors should speak with their tax advisors to determine which of these options is relevant to their own personal situation. Some advisors may suggest the determining factor is based on who (the investor or employer) makes the contribution. A popular view is that option 1 prevails if the investor makes the bulk of the contributions and option 2 if the employer makes the majority of the contributions.

It's important to invest only in tax deferred retirement funds. There are funds that pay out gains annually, this is where you get into hot water, it's not truly a retirement account then. PFIC, 3520, 3520-A etc... You'll need to be made of strong stuff to work through those forms.

It's important to invest only in tax deferred retirement funds. There are funds that pay out gains annually, this is where you get into hot water, it's not truly a retirement account then. PFIC, 3520, 3520-A etc... You'll need to be made of strong stuff to work through those forms.

SIPPs are UK personal pensions and grow tax deferred in the UK. The US treatment of them is debated by the professionals, some taking the position that they are pension plans as defined in the treaty and some that they are foreign grantor trusts and require annual tax filing and forms like 3520 and 8621 etc.

A popular view is that they should be treated as foreign grantor trusts if the investor makes the bulk of the contributions and as pension schemes under the treaty if the employer makes the majority of the contributions.

IMHO the UK spectrum of retirement funds is badly covered in the treaty when compared to the US funds included. My IRAs, 403b etc definitely come under the treaty even though I've paid more into them than any of my employers and they are far more similar to UK personal pensions (eg SIPPs) than a traditional employer sponsored final salary scheme.

I think this reflects the more wide spread use of self directed defined contribution retirement plans in the US vs the UK when the treaty was drafted. Now that personal pensions are increasingly replacing traditional pension plans in the UK the treaty looks very out of date.

Investments currently permitted by primary legislation but subsequently made subject to heavy tax penalties include:

Assets like vintage cars, wine, stamps and art. Residential property

Best to stay clear of these...