UK pensions and UK tax

Hi, I'm new to the forums, and was surprised that there aren't any articles about this. My position is, I'm a US/UK dual citizen, have lived in the UK all my working life and am now coming up to retirement with several "defined contribution" pension pots. I've been filing US tax returns taking the foreign earned income exemption, and showing my pension funds on the 8938 and FBAR.
The question is, for someone who knows very little about US tax and pension arrangements, what happens in US tax terms when I start taking my pension? Given the new rules about pension freedom in the UK, can I just draw down money from my funds, or do I have to buy an annuity? Are there any tax implications if I transfer my funds so they are all with one provider?
Any advice on this would be most welcome as I'm seriously worried that the US will want a large chunk of my pension savings if I do the wrong thing. Thanks.

The question is, for someone who knows very little about US tax and pension arrangements, what happens in US tax terms when I start taking my pension? Given the new rules about pension freedom in the UK, can I just draw down money from my funds, or do I have to buy an annuity?

For the US, pension income sourced in the UK is treated as unearned income and is taxable (gross), whether from a defined contribution scheme, or from an annuity. Since it is 'unearned', it can not be included on Form 2555. Instead, one now has to use Form 1116 to claim UK tax paid on the pensions.

As to reporting on Form 8938 and FBAR, general practice is to continue including the pensions on these forms.

For the professionals: is a pension in drawdown phase really considered an asset on 8938 and 8854? Discuss. 

Are there any tax implications if I transfer my funds so they are all with one provider?

This is disputed on internet forums, amongst some professional advisors, and advice when given by the IRS, and what exactly the US/UK Tax Treaty specifies. You need to investigate the exact type of funds you're transferring from, and the type of funds you are transferring to. Generally, if the transfer can be deemed by the IRS to be a 'taxable event', then US tax is due subject to the specifics of the Treaty.

This is disputed on internet forums, amongst some professional advisors, and advice when given by the IRS, and what exactly the US/UK Tax Treaty specifies. You need to investigate the exact type of funds you're transferring from, and the type of funds you are transferring to. Generally, if the transfer can be deemed by the IRS to be a 'taxable event', then US tax is due subject to the specifics of the Treaty.

If you are transferring from accounts that are both in the UK and that are both recognized as pension plans under UK legislation then it will not be a taxable event. So if you have a UK employer DC retirement plan and you roll it over to a SIPP (IMHO) it would not be a taxable event. As you own UK pension funds how you take income or whether you buy an annuity isn't governed by any US rules......as long as you keep the money in a UK based pension plan the IRS will just want to tax any income you take.

Once you start taking income from your UK pensions you will have to include that income on your US taxes (on line 16) and take a foreign tax credit for UK tax you pay on it on a form 1116 and include it in the "General Income" basket. If your pension is from the UK Government some special rules will apply.

If you are getting UK state pension as a US citizen resident in the UK strictly speaking that would be taxable in both the US and the UK and you'd have to include that on your US taxes as well. This comes about from a poorly worded paragraph in the Tax Treaty.

Thanks, this is a helpful start. I have been trying to get information off various forums and websites, but find it very confusing. The treaty terms seem very unclear and the various "experts" seem to have conflicting opinions about everything. In particular, most advisers in the UK are very expensive, aim their services at the wealthy, and seem to be in the business of scaring their customers. As for the IRS website, it makes very little sense to a person who is unfamiliar with the US tax system.
I'm also wondering about this form 8333(?) relating to the tax treaty - when do people use it, and would it be necessary in my position?
And on the 1040, is it sufficient just to put the amount of the pension income on line 16a? Is there any further information required, or a supporting schedule? For the next few years, until I collect my state pension, I don't expect to be paying UK income tax so the tax credit form would not be relevant.
And if I'm earning less than the total of the standard deduction plus personal exemption do I need to file a tax return at all? I'm married to a UK citizen.

....The treaty terms seem very unclear and the various "experts" seem to have conflicting opinions about everything.
I'm also wondering about this form 8333(?) relating to the tax treaty - when do people use it, and would it be necessary in my position?

The need to file 8833 is one of those areas which may be unclear. You mention you do have some defined contribution UK pensions. For the pros, most will have a definite opinion as to filing both 8833 or additional forms; but talk to the IRS and you may receive a different opinion. I'll leave it to others to debate this. IMHO, probably not given what you have described providing you are happy with the results.

And on the 1040, is it sufficient just to put the amount of the pension income on line 16a? Is there any further information required, or a supporting schedule?

The IRS will not expect any verification of the amount to be submitted with your return. Since it's from the UK, the IRS computers will have no understanding of the documents anyway. If a question does arise, then you will need accurate records as to how you arrived at the amount. For the UK State Pension, you may use line 16a and b, or you may use line 21, labelling the amount as "Foreign Social Security Pension".

For the next few years, until I collect my state pension, I don't expect to be paying UK income tax so the tax credit form would not be relevant.
And if I'm earning less than the total of the standard deduction plus personal exemption do I need to file a tax return at all? I'm married to a UK citizen.

If you file as Married Filing Separate (MFS) which is recommended for someone in your situation, the threshold for filing a US tax return (for 2014, for example) is $3,950. Be sure you understand the options of filing Married Filing Jointly (MFJ). The threshold rises to a minimum of $20,300, and can go slightly higher, but you must include all the income of your spouse. If your income, which will include interest from savings accounts (both in your name only or jointly held), dividends, etc., is above the threshold for the year, you should file a US tax return.

The standard deduction is $6,200. For those over 65, it rises to $7,400. The personal exemption is $3,950. (All figures are for 2014.)

Therefore, if you have only pension income plus tax free (ISA) income (or other interest which will fall under the new $1,000 tax free amount), and you fall below the UK Personal Allowance where no UK tax is due, you will have no UK tax paid to offset any US tax due if the total amount of income is above the $10,150 minimum (Std. Deduct plus Pers. Exempt.) for less than 65 years old (or $11,350 if 65+) for the US 1040 return. 

Here's a handy chart of how US/UK pensions are taxed:

http://intltax.typepad.com/894_pension_taxation_uk.pdf