"Tax free" pension portion

Greetings - I'm a newbie and I hunted around a bit but please forgive me if this has been covered already. I'm a dual US/UK citizen. I have a defined contribution pension in the UK from my time working there. I'm currently not in the UK but am planning to return to live next year (it isn't really germane to this question but for the record I left in June 2011 and will return in May or June 2017).

My question is, what is the consensus of the board re the 25% (UK) tax free portion of my pension pot. My sense has always been that the US would regard that as unearned income and tax it. I had an investment advisor who deals with expats tell me it was a "grey area" and it wouldn't be taxed; I had an accountant laugh in my face when I asked him, saying of course the US would tax it.

Anybody have real life experience?

If it is taxed, maybe it is better for someone who falls into both tax nets not to take it, and simply let the amount continue to grow (hopefully) tax free until it is needed.

Many thanks for your wisdom and experience

Greetings - I'm a newbie and I hunted around a bit but please forgive me if this has been covered already. I'm a dual US/UK citizen. I have a defined contribution pension in the UK from my time working there. I'm currently not in the UK but am planning to return to live next year (it isn't really germane to this question but for the record I left in June 2011 and will return in May or June 2017).

My question is, what is the consensus of the board re the 25% (UK) tax free portion of my pension pot. My sense has always been that the US would regard that as unearned income and tax it. I had an investment advisor who deals with expats tell me it was a "grey area" and it wouldn't be taxed; I had an accountant laugh in my face when I asked him, saying of course the US would tax it.

Anybody have real life experience?

If it is taxed, maybe it is better for someone who falls into both tax nets not to take it, and simply let the amount continue to grow (hopefully) tax free until it is needed.

Many thanks for your wisdom and experience

The correct answer is that no-body knows; because US domestic law would tax any amount in excess of basis, but the treaty is so badly worded that it can be interpreted in any way you like. Significant changes to UK domestic pension law in 2015 muddy the waters further.

The cautious answer is to tax it in the US, and use any excess foreign tax credits including some that you are hopefully carrying forward from your previous stay in the UK.

Many thanks. Alas I used up all my credits (got a tinsel handshake that had a U.K. Tax-free portion because of time spent abroad). I am trying to get clarity from my plan but my reading of the rules suggests I don't have to take the tax-free portion all at once ~ just crystallize it and then draw it down gradually. That would at least let me control my us brackets.


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If you could live with and are allowed to take an increased pension in some way instead of taking the lump sum, then you would avoid being pushed into a high US tax bracket in the LS distribution year.  Explain the possible problem to the pension provider and take any options offerred to a competent international tax account.  Also clarify, is it a pension (paid for out of 'before tax' salary) or an annuity you bought with your after tax income.  they are not taxed the same way.

I went to a well know chain of tax accountants who claimed to know about UK-US tax, and I ended up telling them more than they already knew.  Always go to a specialist who makes their living out of dealing with UK-US tax as a speciality.  Avoid your local 'high street' tax and financial advisors.