UK Pensions Guide for US-connected Women
If you are an American woman living and working in the UK, your pension is almost certainly more complicated than your employer has let on. The interaction between the US and UK tax systems creates reporting obligations, compliance risks, and retirement planning decisions that most people only discover after the fact. We sat down with Sarah Whitelaw, partner in Buzzacott's US/UK tax team, to get the full picture.
Your UK pension is not a qualifying pension in the US
This is the foundational thing to understand. The US does not recognise a UK pension as it would a 401(k) or an IRA, which means the tax treatment diverges significantly. Employer contributions to a UK pension are taxable in the US in the year they are made, appearing on your US return as part of your compensation. If you are in a salary sacrifice arrangement, which most group personal pension plans now are, employee contributions made through that route are treated as employer contributions too. So in many cases, everything going into the pension is taxable from a US perspective.
There are ways to manage this. If the UK tax rate you are paying on your salary via PAYE generates more foreign tax credits than you need to offset against your US liability, those excess credits can be applied against the pension contributions instead. At a top UK rate of 45% versus 37% in the US, that excess is not uncommon. The US-UK double taxation treaty also offers a route to take those contributions out of the US tax net altogether, which is particularly useful if the credits are not available.
The annual growth may need to be reported too
Beyond contributions, there is potentially an annual reporting requirement for the growth in value of your pension. Sarah is clear that this depends on the structure of the plan and how it has been treated over time, but it is not something to assume away. Keeping track of how your pension has been reported on the US side throughout the contribution phase matters enormously at distribution, because it determines how much basis you have in the plan and therefore what is and is not taxable when you eventually take money out.
SIPPs are a particular headache for US-connected women
Self-invested personal pensions come with additional complexity because, from a US standpoint, they are typically classified as foreign trusts. That classification triggers two extra forms: the 3520 (reporting transactions with the trust, including contributions and distributions) and the 3520-A (reporting the underlying income and gains within the trust annually). Both carry penalties for non-filing, and both add cost to the annual compliance picture.
The investments held within a SIPP can add another layer of difficulty. Funds that are not publicly listed or are only accessible via the SIPP vehicle may be classified as passive foreign investment companies, which are treated punitively under US tax law. The treaty does offer relief, but it requires careful navigation to apply it correctly.
One practical note from Sarah: if a SIPP is contract-based rather than trust-based, and its investments are in funds not publicly available outside the vehicle, it may be possible to treat the plan as opaque for US purposes, removing the 3520 filing requirement entirely. It is worth asking the question before you open one.
Consolidating pensions is not as straightforward as it sounds
Many women in our community have accumulated several pension pots across different employers, often without thinking much about the tax implications. Consolidating them into a single plan is tempting, and for practical reasons it often makes sense, but there are US tax consequences to consider. A transfer between plans is treated as a taxable distribution from a US perspective, even if the UK does not tax it, meaning the treaty needs to be applied to avoid a US tax bill. The nature of the contributions is also lost on transfer: a plan that was employer-funded and therefore relatively straightforward to report becomes a personally funded plan after consolidation, potentially bringing it back into the 3520 filing world.
Not knowing is not a defence, but it is not the end of the world either
When Sarah takes on a new client, part of the onboarding process involves reviewing how the pension has been treated historically. It is common to find that things have not been reported correctly, and the reasons are almost always understandable. The complexity is genuine and UK employers are not set up to flag it.
The IRS does have routes back to compliance. The Streamlined Foreign Offshore Procedure is available where there has been non-wilful failure to report, meaning no deliberate tax evasion, and where the individual has been outside the US for more than 330 days in at least one of the three preceding tax years. If eligible, you file three years of tax returns and six years of foreign bank account reports, pay any tax due plus interest, and are protected from penalties. The penalties for non-compliance with some of the other forms, particularly the 3520, can be significant, so the streamlined route is an attractive option for those who qualify.
The decisions at retirement are just as important as the ones you make now
Where you are resident when you start taking distributions changes the picture considerably. For periodic payments, the primary taxing right sits with the country of residence: UK residents pay UK tax and credit it in the US, while US residents pay US tax with no UK liability. Lump sum payments are treated differently, with the UK holding the primary taxing right regardless of where you are living.
The 25% tax-free lump sum that UK pension rules allow is honoured by the treaty for US federal purposes, so it is not taxable in the US either. But state taxes are another matter entirely, and some states, California being the most prominent example, do not recognise the treaty and would seek to tax that lump sum regardless. Timing a move carefully relative to when you take that payment is worth thinking about.
Sarah's overarching advice for retirement planning: know where your basis is, understand which pots have been well-reported and which may need attention, and get a financial adviser who understands the full picture, not just the UK side, involved early.
The simplest thing you can do right now
If you are contributing to a workplace pension in the UK and you have US connections, start by understanding what type of plan it is and how contributions are being made. If you are in salary sacrifice, your reporting obligations are more manageable. If you have a SIPP, or are thinking about opening one, take advice before doing so. And if you have not had a proper cross-border review of your pension position, do that before the returns get harder to unwind.