global Tax Do You Hold a Pension Account in the UK? Take Advantage of the 25% Tax-Free Lump Sum June 04, 2024 Attention taxpayers…do you hold pension accounts in the UK? If you’re planning on retiring soon, you may be eligible to withdraw 25% of your pension as a tax free lump sum. Here are the details. Planning on retiring soon? Do you hold pension accounts in the United Kingdom? You might consider taking advantage of the U.K.’s 25% tax-free lump sum distribution regime. Here’s what you should know. What is the U.K. 25% tax-free lump sum? Taxpayers aged 55 or older (57 as of 2028) who hold retirement accounts in the United Kingdom are eligible to withdraw up to 25% (max. £268,375) of the amount in any pension fund as a tax-free lump sum in the United Kingdom. Sounds great right? But how does this impact your U.S. tax filing? How are U.K. pensions taxed in the U.S.? U.K. pension distributions are subject to income tax reporting in the U.S. as they are treated as ‘other pension income’ and therefore must be included on your individual income tax return. Is there protection available under the U.S.-U.K. tax treaty? Treaty protection is available and taking advantage of it can result in U.S. tax savings of up to 37%. With thoughtful tax planning, taxpayers can mitigate their U.K. and U.S. tax exposure (in a variety of ways) to draw down on their U.K. pension funds. Alternative options? If you are considering consolidating your pensions in the hopes of easing your reporting burden, please refer to our other blog where we discuss the options available. Keep in mind that holding a non-U.S. pension may result in additional reporting obligations on your U.S. return including: FinCEN Form 114 (FBAR)Form 8938Form 3520Form 8621
