Learn More

US Tax on a UK Pension Lump Sum: Rates, Reporting, and Mitigation Strategies

Last updated on February 20, 2026 • About 14 min. read

Author

Mathew Samuel

Private Wealth Team Director

| Titan Wealth International

This article is provided for general information only and reflects our understanding at the date of publication. The article is intended to explain the topic and should not be relied upon as personalised financial, investment or tax advice. We work with clients in multiple jurisdictions, each with different legal, tax and regulatory regimes. This article provides a generic overview only and does not take account of your personal circumstances; you should seek professional financial and tax advice specific to the countries in which you may have tax or other liabilities.

Withdrawing a tax-free lump sum from a UK pension may still result in a substantial US tax bill for American citizens. While the UK generally allows up to 25% of pension benefits to be taken as tax-free cash (typically through the pension commencement lump sum), the IRS may treat such withdrawals as taxable pension income, regardless of their tax-free status in the UK.

This risk is often more pronounced if no UK tax is withheld, in which case no foreign tax credit (FTC) may be available. In these circumstances, you may face full US taxation on the taxable portion of the distribution, and in some cases, effective double taxation where different countries tax different elements of the same pension.

To help you avoid excessive taxation, this article explains how US tax on a UK pension lump sum works, how the US–UK tax treaty (including the saving clause) affects the analysis, and outlines common strategies for mitigating your overall tax liability.

What You Will Learn

  • The cross-border tax implications of withdrawing a lump sum from a UK pension.
  • Specific taxation scenarios and the corresponding optimisation strategies.
  • The essential reporting obligations under US tax law, including how the US–UK tax treaty and saving clause may affect your position.

What Is a UK Pension Lump Sum?

A UK pension lump sum is a cash withdrawal from your pension savings that you may initiate upon reaching the normal minimum pension age in the UK. The threshold for most individuals is 55 as of this writing, and is scheduled to increase to 57 in April 2028 (subject to limited protected pension ages for certain members).

While you may generally withdraw up to 25% of your pension pot as tax-free cash, the amount is effectively limited by the lump sum allowance (LSA), which is normally £268,275 (unless you hold valid lifetime allowance protections that preserve a higher entitlement).

Defined Benefit vs Defined Contribution: Why It Matters for US Tax

Not all UK pensions operate in the same way, and the structure of your plan can affect US tax treatment.

Most modern workplace pensions and SIPPs are defined contribution (DC) schemes, where you build an investment pot and can typically withdraw up to 25% as tax-free cash.

By contrast, defined benefit (DB) or “final salary” schemes promise a lifetime income based on salary and years of service.

In these schemes, a lump sum often arises by commuting part of the future pension income, and the amount available may be determined by scheme-specific commutation factors rather than a simple 25% calculation.

From a US tax perspective, the IRS does not automatically follow UK terminology. The classification of the plan and the mechanics of the lump sum can affect:

  • How taxable income is calculated
  • Whether any basis exists
  • Reporting treatment
  • The character of the distribution

US citizens with DB schemes, particularly public sector pensions such as NHS or civil service plans, should obtain advice before assuming the tax outcome mirrors that of a SIPP or personal pension.

Depending on your objectives and the type of pension benefits you are accessing, a lump sum may be taken in several forms:

Lump Sum Form Explanation
Pension commencement lump sum (PCLS) A lump sum of up to 25% of the pension pot paid when you first access (crystallise) pension benefits (e.g., when entering drawdown or purchasing an annuity), subject to the applicable lump sum allowance.
Uncrystallised funds pension lump sum (UFPLS) A withdrawal made directly from uncrystallised pension benefits without first designating funds to drawdown. 25% of the amount taken is typically tax-free, while the remaining 75% is taxed as regular income in the UK under PAYE at your marginal rate.
Trivial commutation lump sum A one-off payment available only if the total value of your pension pot (across all arrangements, excluding the State Pension) does not exceed £30,000.

How Does the US Tax Law Treat UK Pension Lump Sums?

Under US tax law, US citizens and tax residents are taxed on their worldwide income, including lump-sum payments from UK pension arrangements. As a result, a UK tax-free pension lump sum may still be reportable and potentially taxable as ordinary income under US rules (generally under Internal Revenue Code §72, subject to any recoverable after-tax basis).

While the US and the UK have a double taxation agreement (DTA) that assigns taxing rights over particular pension payments to one country based on residence, it also includes a “saving clause.”

This provision generally preserves the US’s right to tax its citizens as if the treaty had not entered into force, meaning US citizens typically cannot rely on the treaty to exclude UK pension lump sums from US taxation.

Does the 10% US Early Withdrawal Penalty Apply?

The additional 10% tax under Internal Revenue Code §72(t) typically applies to early distributions from US-qualified retirement plans (such as 401(k)s and IRAs).

Most UK pensions are not US-qualified retirement plans. As a result, the 10% early withdrawal penalty does not generally apply in the same way it would to a US-qualified plan, and in many cases is not imposed on distributions from foreign employer pension arrangements.

However, classification can vary depending on the structure of the plan and how it is treated for US tax purposes. If you are accessing benefits before age 59½, it is prudent to confirm that no additional US penalty applies.

This cross-border overlay may significantly complicate your tax obligations compared to receiving purely domestic pension income. If you require assistance in interpreting the applicable rules and structuring withdrawals to reduce your tax burden, Titan Wealth International can help. Our advisers can clarify your tax liabilities and coordinate an approach that aligns your retirement plans with broader tax and estate objectives.

Concerned About US Tax on Your UK Pension Lump Sum?

Is the Entire Lump Sum Always Taxable in the US?

While many US citizens find that most of their UK pension lump sum is taxable in the US, it is not automatically 100% taxable in every case.

Under Internal Revenue Code §72, only the portion of a pension distribution that represents previously untaxed employer contributions, untaxed employee contributions, and investment growth is subject to income tax.

If you made employee contributions to your UK pension from income that was already taxed in the US, and you did not claim treaty deferral on those contributions, you may have US tax “basis” in the plan that can be recovered tax-free when distributions are taken, subject to the pro-rata rules under §72.

In practical terms:

  • Employer contributions are generally taxable when distributed.
  • Investment growth is generally taxable.
  • Employee contributions may be non-taxable to the extent they were previously included in US taxable income and properly tracked as basis.

However, many US expats working in the UK relied on treaty provisions to defer US taxation on contributions or excluded employer contributions from US income. In such cases, most or all of the lump sum may be taxable upon withdrawal.

Because contribution histories vary significantly, reconstructing your US tax basis before taking a lump sum is essential. Assuming the full 25% will be tax-free in the US, simply because it is tax-free in the UK, can lead to an unexpected tax bill.

Assuming the full 25% will be tax-free in the US, simply because it is tax-free in the UK, can lead to an unexpected tax bill.

Mathew Samuel

Private Wealth Team Director

How Should US Citizens Manage UK Lump Sum Taxation?

The most appropriate strategies for managing the tax treatment of a UK pension lump sum depend primarily on your country of tax residence at the time of withdrawal and your US citizenship status, as US citizens remain subject to US taxation regardless of residence.

Consequently, the analysis typically falls into three scenarios:

  1. US citizen residing in the UK.
  2. US citizen residing in the US (repatriated).
  3. US citizen residing in a third country.

US Citizen Residing in the UK

If you are a US citizen contributing to or holding a UK pension (such as a SIPP or workplace pension), you can take a lump sum (commonly as a PCLS), of which up to 25% will be tax-free in the UK (subject to the applicable lump sum allowance). However, even if you retire and remain in the UK, you will still need to report the distribution to the IRS.

Since the UK does not levy tax on the PCLS, there will be no foreign tax credit (FTC) to offset the US tax. Consequently, your US tax bill will likely be calculated on most or all of the taxable portion of the withdrawal under US rules, subject to any recoverable US tax basis.

If the lump sum exceeds the UK tax-free limit, the excess will also be taxable in the UK. However, in that case, UK tax paid on that taxable portion may be creditable on your US tax return, subject to the foreign tax credit limitations and sourcing rules.

While it is not possible to fully avoid US taxation, you may optimise it through several strategies, most notably:

  • Spreading withdrawals across tax years: Instead of taking a large distribution in a single year, which may push you into a higher US marginal tax bracket, consider withdrawing smaller amounts over the years.
  • Timing withdrawals for lower-income years: Where possible, take lump sums in years when your other taxable income is lower (e.g., after you stop working).
  • Combining withdrawals with deductible events: Consider making withdrawals in years when you can maximise deductions or credits (such as charitable giving) or realise capital losses to improve overall tax efficiency.
  • Utilising drawdown: Instead of crystallising a large lump sum at once, flexible drawdown can help you align withdrawals with evolving tax circumstances and cash-flow needs.
  • Seeking professional guidance: Coordinate with both a US-qualified CPA and a UK pension adviser to understand and manage the complexities of cross-border taxation.

US Citizen Residing in the US (Repatriated)

If you accrued a UK pension through prior employment or residency and have since repatriated to the US, you may still access a pension lump sum upon meeting the UK’s pension access requirements.

In this scenario, the tax outcome is often similar to what you would face as a UK resident:

  • UK treatment: Up to 25% may be taken as a PCLS without UK tax.
  • US treatment: The US may treat the entire lump sum as taxable ordinary income to the extent it represents untaxed contributions and growth under US rules.
  • Relief availability: Because the PCLS is not taxed in the UK, you cannot claim a foreign tax credit to offset the US liability.

One meaningful variable may be your state of residence. Certain states, such as Florida and Texas, do not impose personal income tax, so your exposure would be limited to federal tax. By contrast, states such as New York and California may also tax pension distributions, increasing the overall burden.

As a repatriate, you may optimise your US tax obligations through careful timing and structuring, including:

  • Deferring or phasing withdrawals: Consider taking multiple smaller distributions over several years rather than a single lump sum to spread income and potentially remain in lower tax brackets.
  • Coordinating withdrawals with low-income years: If you are approaching retirement, plan withdrawals for years when employment income has ceased or substantially reduced.
  • Utilising Roth conversions: In low-income years, you may combine UK pension withdrawals with a broader strategy such as Roth conversions to manage total taxable income and marginal rates.
  • Treating UK pension as a bond-style income source: View the UK pension as an ongoing income source, rather than a one-off event, to support more consistent tax planning.
  • Planning for currency conversion effects: The IRS requires pension income received in GBP to be reported in USD for the year of receipt (typically using the IRS yearly average or spot rate). Exchange rate fluctuations can materially affect the USD taxable amount, so it is prudent to plan for volatility.

State Income Tax: A Commonly Overlooked Cost

While federal tax receives most of the attention, state taxation can materially increase the overall burden.

US states do not follow US tax treaties. Even if foreign tax credits reduce your federal liability, your state may still tax the entire lump sum as ordinary income.

For example:

  • States such as Florida and Texas impose no personal income tax.
  • States such as California and New York generally tax foreign pension distributions in full.

If you have flexibility over where you establish residency before accessing your UK pension, state tax considerations may materially affect your net outcome.

Currency Exchange Risk and “Phantom” US Taxable Income

US tax must be calculated in US dollars. If your UK pension is denominated in GBP, the distribution must be converted into USD at the applicable exchange rate on the date of receipt (or yearly average rate, where appropriate under IRS guidance).

This creates an additional layer of tax risk.

If sterling strengthens against the dollar between the time contributions were made and the time the lump sum is taken, the USD value of your withdrawal may increase — even if there has been limited real growth in GBP terms.

In effect, exchange rate movements alone can increase your US taxable income.

For repatriated US citizens holding substantial UK pension assets, currency volatility should form part of the withdrawal timing decision, particularly in years where exchange rate swings could move you into a higher marginal tax bracket.

US Citizen Residing in a Third Country

In most cases, you can access a UK pension while living in a third country without significant challenges. However, your tax position will likely be more complicated if your retirement residence is neither the UK nor the US.

While the UK and US rules remain the same (25% tax-free cash alongside full US taxation), your country of residence may also tax the lump sum and/or ongoing pension income according to its domestic laws. The only exception is if you reside in a jurisdiction with no personal income tax, such as the UAE.

UK Withholding and Treaty Claims for Non-Residents

If you are no longer UK tax resident, your UK pension remains UK-source income under domestic law. However, the UK’s right to tax that income may be limited under an applicable double taxation agreement (DTA) between the UK and your country of residence.

In many cases, the UK will not tax the 25% pension commencement lump sum. However, taxable portions of pension withdrawals may be subject to UK PAYE withholding unless treaty relief is formally claimed.

To prevent unnecessary UK withholding, you may need to submit the appropriate HMRC treaty relief forms through your pension provider. Failure to do so can result in tax being deducted at source, even where a treaty allocates taxing rights elsewhere.

For US citizens, even if UK tax is eliminated under a treaty, the US saving clause generally preserves the US right to tax the distribution. As a result, eliminating UK tax does not remove US taxation, but it may remove the availability of a foreign tax credit.

Consequently, it is critical to understand the local tax rules for foreign pensions and assess whether your host country has a DTA with the UK and/or the US. Even where DTA relief is available, the US saving clause commonly preserves US taxing rights over its citizens.

That said, you may be able to utilise an FTC to mitigate double taxation, depending on where and how tax is ultimately imposed and subject to the US foreign tax credit limitation rules.

The most effective tax optimisation strategies for US expats in third countries include:

  • Timing withdrawals strategically: If your host country does not tax foreign pension income, consider taking the lump sum while a resident there to reduce overall tax friction.
  • Addressing currency misalignment: If your pension is denominated in GBP but your living costs are in another currency (EUR, AED, etc.), account for currency conversions and volatility to avoid unexpected reductions in purchasing power.
  • Maintaining full reporting compliance: Even if little or no local tax is due, you must still report the UK lump sum distribution on your US tax return. Failing to declare it or doing so inaccurately may result in substantial fines.

Which US Reporting Requirements You Must Adhere To

Regardless of your country of residence, the IRS requires full reporting of foreign pension income and related financial accounts.

The most notable reporting obligations include:

Form Reporting Details
Form 1040 Reporting the UK lump sum as pension/annuity income (typically on lines 5a/5b), with the taxable amount determined under US rules and any recoverable basis reflected appropriately.
Form 8938 (FATCA) Utilise this form to declare your aggregate specified foreign financial assets (which may include foreign pensions) if they exceed the applicable threshold for your filing status and residency, noting that reporting thresholds differ depending on whether you reside in the US or abroad.
FBAR (FinCEN Form 114) File this form if the aggregate value of your foreign financial accounts (including certain foreign pension accounts over which you have a financial interest or signature authority) exceeds $10,000 at any time during the year. Defined benefit schemes may require separate analysis, as not all arrangements are treated as reportable accounts.
Forms 3520 / 3520-A These forms may be required when foreign pensions are treated as trusts for US tax purposes. Form 3520 is generally used to report certain transactions (including distributions), while Form 3520-A is an annual information return for the foreign trust, typically filed by the trustee. However, certain employer-sponsored foreign retirement plans may be exempt from Forms 3520 and 3520-A under IRS Revenue Procedure 2020-17, subject to meeting specific conditions.
Form 8621 (PFIC) If your UK pension holds non-US pooled investments, such as mutual funds, that meet the definition of a passive foreign investment company (PFIC), you may need to file Form 8621 for each such entity unless the pension is treated as a treaty-protected retirement plan that is not subject to annual PFIC look-through reporting. The reporting position depends on plan classification.

The IRS places significant emphasis on accurate reporting of foreign income and offshore disclosure. Assuming a UK pension distribution is tax-free for US purposes and failing to declare it may lead to avoidable tax liability and potential non-compliance penalties.

Where the classification of a UK pension is unclear, or where the plan holds non-US funds, it is prudent to obtain professional advice to confirm the correct reporting approach.

Can the Foreign Earned Income Exclusion Reduce the Tax?

No. The Foreign Earned Income Exclusion (FEIE) applies only to earned income derived from personal services performed abroad.

Pension distributions are considered unearned income for US tax purposes. As such, they cannot be excluded using the FEIE, even if you are living and working overseas.

This distinction is important for US citizens in the UK and third countries who rely on the FEIE for employment income but assume it may also shelter pension withdrawals.

The Cost of Incorrect Reporting

The IRS places significant emphasis on accurate reporting of foreign financial assets and income.

Penalties for failing to file FBARs, Forms 8938, or required foreign trust disclosures can apply even where no additional tax is due, and certain foreign trust reporting penalties can be calculated as a percentage of the asset value.

Because UK pensions occupy a complex position under US tax law, incorrect assumptions, particularly around “tax-free” treatment, can create avoidable compliance risk. A professional review is often less costly than remediation.

US–UK Pension Tax Review

Accessing a UK pension as a US citizen requires more than understanding the 25% tax-free rule. Treaty provisions, the saving clause, basis calculations, state taxation, and reporting obligations can materially affect how much you ultimately retain.

In an introductory consultation with Titan Wealth International, you will:

  • Review how your UK pension would be taxed under US rules, including the impact of the saving clause and potential foreign tax credit limitations.
  • Assess withdrawal timing strategies to help manage marginal tax exposure across the UK, US, or a third country of residence.
  • Understand the reporting requirements attached to your pension and how coordinated UK–US planning can reduce avoidable compliance risk.

Key Takeaway

If you are a US citizen or green-card holder with a UK pension, you should not assume that the UK tax allowances or tax-free treatment automatically apply in the US. The IRS treats foreign pension distributions (including lump sums) as regular taxable income that must be reported accordingly, subject to the recovery of any properly documented after-tax basis under US rules.

Because the US taxes worldwide income, managing a UK pension often requires strategic cross-border planning that accounts for DTA positions, the impact of the treaty saving clause, local taxation, and US reporting requirements. In many cases, expats find professional assistance invaluable in ensuring compliant reporting and mitigating the overall tax burden.

If you wish to minimise avoidable tax on your pension income, Titan Wealth International can help. Our advisers design coordinated retirement strategies tailored to your cross-border circumstances, helping you retain more of your income while navigating complex UK–US reporting requirements. Where appropriate, we work in conjunction with qualified US tax professionals to ensure your position is aligned on both sides of the Atlantic.

The information provided in this article is not a substitute for personalised financial, tax or legal advice. You should obtain financial advice and tax advice tailored to your particular circumstances and in respect of any jurisdictions where you may have tax or other liabilities. Titan Wealth International accepts no liability for any direct or indirect loss arising from the use of, or reliance on, this information, nor for any errors or omissions in the content.

Author

Mathew Samuel

Private Wealth Team Director

Mathew Samuel, APFS, is a Chartered Financial Planner with 8 years’ experience in UK and US financial services. Specialising in cross-border advice, 401k rollovers, pension transfers, and tax planning, Mathew provides high-net-worth clients with tailored strategies. As a writer on international finance, he offers insights to help US readers navigate their complex global financial needs confidently.

Book a Call