How can I access the pension I built up in the US?

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I worked in the US for a few years before returning back to the UK. Whilst out there I built up a $31,000 pension in 401A and 403Bs (education equivalents of a 401K). Unlike my UK-based SIPP pension which I can access from 55, I cannot access these until 59.5 years old.
I know there is a tax treaty between the US and UK. Fortunately, I still have a US bank account and credit card. Please can you tell me how I access this pension from the UK and pay tax on it? Do I need to report to the IRS as well? My tax-free allowance will be used up by my UK pensions.
Ian

Rachel Vahey, AJ Bell Head of Public Policy, says:

In the modern global business environment, it’s easy to see how someone can build up pension wealth in one country and then take the income in another.

A first instinct may be to think about transferring your pension to the UK. However, pensions cannot be transferred between the UK and the US, as the two countries’ regimes are essentially incompatible.

So, instead, let’s start by looking at the features of your US pensions. Although you can access your UK SIPP from age 55 (rising to age 57 from 2028), you cannot access these funds until you are approaching your 60th birthday otherwise you could incur hefty US penalties. Most providers will let you take either regular income payments or you could withdraw your entire accumulated balance all at once. While that gives you full access, there will be tax implications, and the entire amount is subject to income tax in the year you withdraw it.

Theoretically, you may also be able to use your account balance to buy an annuity, but in reality most US providers will only set up an annuity for someone with a US address or tax ID. There could also be tax implications on taking this route.

If you decide to withdraw money from your account, first contact your US pension provider, who will be able to tell you your current balance and what withdrawal options you have. You will also want to check whether non-US residents can maintain the accounts.

In broad terms, if you are now UK tax resident and no longer US tax resident, your income will be subject to the UK-US double tax treaty. A double tax treaty is an agreement between two countries to prevent the same income or gains from being taxed twice. It determines which country has the right to tax you and, if both claim the right, outlines either a tax exemption or a credit for taxes already paid.

How it could work in practice

In practice, this means the US may still tax withdrawals from these pensions first. But if you also report the income to HMRC on your UK Self Assessment tax return as foreign pension income, you can usually claim foreign credits for any US tax paid, so you should not be taxed twice on the same money.

(Be aware that HMRC recently clarified their position on lump sum payments from US pensions, confirming that they will also be subject to UK tax, with a foreign tax credit allowed for any US taxes paid.)

You should also check with your US provider whether the plans levy withholding taxes automatically for overseas residents unless treaty claims are submitted in advance.

As you have a US bank account the income can be paid directly into that. However, you will bear the currency risk of converting dollars into pounds, and your retirement income will fluctuate with exchange rates.

Whether you also need to file with the IRS depends mainly on your US status. If you are not a US citizen or green card holder and have no other US filing obligations, you may not need to file annual US tax returns once treaty paperwork is in place.

This can be a very complicated area, especially when it comes to lump sum payments, so it may be a good idea to get cross-border tax advice before taking income, and especially before taking a full encashment.

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How it could work in practice

Rachel Vahey: Head of Public Policy