Confusion over US tax treatment of UK Pension

There are several topics I am confused about and would appreciate any help.

Since one can now take a lump sum distribution from a UK personal pension at age 55 will the US consider this an early withdrawl and penalise you 10%?  If one decides to go this route and take your full pension at age 55 while still in the UK and you then decide to move back to the US how will taxation work- guess the question is do you need to remain for some time in the UK after taking a distribution in order for the UK and US not to effectively fight it out for the tax due?  On this note, how do you report this lump sum distribution on your US tax return, can you use basis as I have paid taxes in the US for employer matching while in the UK, can I use tax credits ( if so is the distribution general or passive income)? Additionally If I choose to return to the US and leave the pension in the UK and cash out at a latter date , how is this handled from the UK and US perspective and are their time requirements as to how long I need to be out of the UK etc etc ?

Also, is there any benefit to rolling a few pensions (result of working for a few employers) into a SIPP and is the tax treatment of a SIPP any different from a pension in regards to cashing out the total pension?

Sorry for so many questions but I am in the process of deciding whether to head back to the states and just want to make sure I don't make a mistake as regards to pension issues. 

Lots of questions here. First what is your citizenship?

Early withdrawal penalties are assessed by and paid to the pension's host country.

Changes to the UK pension system will bring up new questions for US tax payers. You can take a 25% tax free sum from a UK pension at age 55, but many people say that is fully taxable in the US. However, as it is not the full value of the pension I wonder whether it is actually a "lump sum" as usually defined by the IRS and now that you can take that 25% as a series of payments over a number of years it looks more and more like a stream of tax free income that would be protected by the treaty.

If you take all your pension as a lump sum (probably not good for tax purposes) you'll pay tax on it in the UK and then pay the US tax due are use tax credits to defray the US tax. There is no question of the US and the UK "fighting over the tax" as the way tax is paid is governed by the treaty.

If you have a tax free US basis in the pension you would only declare the taxable portion on your US taxes.....I hope you have kept good records.

If you leave the pension in the UK and return to the US there will be no UK tax on withdrawals, just US tax.

SIPPS vs employer pensions are a much debated subject with some people saying that are just like pensions under the treaty, with others saying they are foreign trusts. So make your choice and be prepared to back it up. You need to look at fees and investment options to see if a SIPP transfer is a good thing.

Thank you for your comments.  I am a US citizen and deciding whether to take out the whole pension in one shot ( i understand higher tax bracket etc). Just to be clear, are you saying the US won't want a 10% penalty if I take the distribution from the UK pension like they would if i took early distribution from a us 401k or IRA before age 59 1/2? Also is this income from the US perspective passive or general as have plenty of general/income tax credits but very little passive. Regarding basis, i have tax returns showing that any employer contributions were treated as income on my U S tax return- am I missing something or is this enough?  And just to be clear, if I leave the pension here and return to the states there is no time limit that I have to leave the pension in the UK in order to avoid UK taxes and from the flip side if i take a full lump sum in say January in the UK and return to the states in say Feb then I merely do a UK return like normal accounting for the distribution and there is no problem with the US even though i returned to the US say 1 month after distribution ?  Sorry to be so long winded.

Thank you for your comments.  I am a US citizen and deciding whether to take out the whole pension in one shot ( i understand higher tax bracket etc).

Unless your pension sums are very small taking them out all at once is not tax efficient.
You are a ware of the "tax bracket" issue, but you will also loose all that tax deferred growth.

Just to be clear, are you saying the US won't want a 10% penalty if I take the distribution from the UK pension like they would if i took early distribution from a us 401k or IRA before age 59 1/2?

Yes, the UK pensions are governed by UK law. All the US wants is for you to include the income from those pensions on your 1040.

Also is this income from the US perspective passive or general as have plenty of general/income tax credits but very little passive.

You can use the general basket, but there will be no UK tax due on your UK pension if you take the money out if your are US resident.

Regarding basis, i have tax returns showing that any employer contributions were treated as income on my U S tax return- am I missing something or is this enough?

If you've paid tax on contributions already you will have to work out your tax free basis and enter the appropriate amounts on your 1040 line 16a and 16b

And just to be clear, if I leave the pension here and return to the states there is no time limit that I have to leave the pension in the UK in order to avoid UK taxes and from the flip side if i take a full lump sum in say January in the UK and return to the states in say Feb then I merely do a UK return like normal accounting for the distribution and there is no problem with the US even though i returned to the US say 1 month after distribution ?  Sorry to be so long winded.

How, and to who, you pay the tax will depend on your tax residency. If you leave the UK you should file a P85 to establish that you are leaving the UK and returning to the US. If you are leaving the UK permanently and establish non-UK residency, there should be no UK tax on the pension withdrawals.

The timing of your UK pension income means nothing to the IRS as you are always taxed by the US on your worldwide income.

Thank you very much for comments.

So once one moves back to the States and want to take UK pension payments is it necessary to receive the payments in the United States ( i.e. guess you need to set up a pound account in the US?) or can you take the payment in a UK current account? Also will the pension payer take out tax at source or what do you have to do to avoid that?

So once one moves back to the States and want to take UK pension payments is it necessary to receive the payments in the United States ( i.e. guess you need to set up a pound account in the US?) or can you take the payment in a UK current account? Also will the pension payer take out tax at source or what do you have to do to avoid that?

Once in the US you should file an USIndividual 2002 form and an 8802 application for proof of US residency

https://www.gov.uk/government/publications/double-taxation-united-kingdomunited-states-of-america-si-2002-number-2848-form-us-individual-2002

You actually send the form to the IRS who then forward it to HMRC.

This will make sure no UK tax is taken off your UK pensions. How the pension is paid will depend on your administrator, but I bet if you give them your US bank details it can be wired directly to the US. That is definitely the case with the UK state pension.

Once in the US you should file an USIndividual 2002 form and an 8802 application for proof of US residency

https://www.gov.uk/government/publications/double-taxation-united-kingdomunited-states-of-america-si-2002-number-2848-form-us-individual-2002

You actually send the form to the IRS who then forward it to HMRC.

This will make sure no UK tax is taken off your UK pensions. How the pension is paid will depend on your administrator, but I bet if you give them your US bank details it can be wired directly to the US. That is definitely the case with the UK state pension.

+1

This is what I did several years ago, but I decided to have the pension paid into my UK bank as the pension is not large and it is nice to have money in the UK for gifts, subscriptions and paying of voluntary NI contributions.