A UK resident who withdraws all the money from their US pension is only taxed in the US on that amount. On the other hand, a US resident who withdraws all the money from their UK pension is in theory only taxable in the UK on that amount. However, special provision in the tax treaty does allow the US to continue to tax its citizens and residents on that lump sum subject to offsetting the tax with any tax paid to the UK.
We now consider the taxation of pensions in the US. There is no exemption amount equivalent to the UK PCLS in the US, but equally, no special regimes based on the size of a pension. It is worth noting however that there are changes under consideration by the House and Senate relating to the allowable size of a pension, specifically IRA plans, as well as changes to the ability to fund a Roth IRA. A Roth IRA is a completely tax-free pension vehicle, but it will have cost tax at some point to transfer money to such a pension and the amounts available to contribute from after tax funds are relatively low. However, for other types of pensions, to the extent you did not get any tax relief on contributions into the pension — very often with an individual retirement account (IRA) — a portion of every amount withdrawn is not subject to tax based on the ratio of the unrelieved contributions to the total value. Pensions do not have any particularly favourable tax rate. They are taxed as ordinary income based on the tax rate applicable to your situation.
An additional 10% penalty applies to any withdrawals made before age 59 and a half, unless a special exception applies. A special rule does require a beneficiary of a US pension to start withdrawing, at least a required minimum amount, by April of the year following the 72nd birthday, unless they are still working. Residents of a state that imposes an income tax will also be subject to tax in that state on any pension withdrawals. It is worth noting that most states give up the right of taxation on a pension that was earned while the individual lived and worked there but retired to another state, and is no longer considered a resident in the state where the pension was earned.
A US tax resident or citizen overseas, in receipt of a distribution from a foreign pension, is taxed on the distribution in the same way as a domestic pension. The difference will be whether that pension distribution can be taxed in the foreign jurisdiction. In this case, it is likely that a credit for the foreign tax paid will be allowed against the distribution and US tax will only be due if the foreign tax amount is lower than the US. If you are a resident in a state of the US that imposes an income tax, then that foreign pension is likely to be taxed at the state level without any relief for foreign taxes paid. It also may be possible for someone who lives overseas or has only relatively recently returned to the US to retire, if there are old excess foreign tax credits that have not been used and could be eligible to offset the tax on a distribution from a foreign pension plan. There are many variables in this, including whether the individual was able to exclude the growth in the foreign pension from US tax while they were contributing, or equally, was not taxed on contributions made by their employer because of the provisions of a tax treaty. On the other hand, if no tax relief was available in the absence of a tax treaty, they may have already paid tax on the growth in the pension and employer contributions, even if offset by foreign tax credits, and therefore, no tax will arise on the ultimate distribution received.
