Introduction: Why Flexi-Access Drawdown Works Differently for Americans
Flexi-access drawdown is the most flexible way to take money out of a UK defined contribution pension, and for a British taxpayer it is well understood. For an American, however, every withdrawal lands in two tax systems that disagree about almost everything. HMRC treats a quarter of your fund as tax-free cash. The IRS, by contrast, has no concept of tax-free cash from a foreign pension, and it taxes US citizens on worldwide income wherever they live.
That gap is where wealthy clients lose money. In our experience working with senior bankers, fund managers and company owners who built large SIPPs during a London career, the costliest mistakes are not dramatic. Instead, they are timing errors: designating the whole fund in the wrong year, triggering a US bill on tax-free cash with no UK credit to offset it, or moving to America a year too early or too late. Consequently, this guide explains how flexi-access drawdown is taxed on both sides of the Atlantic in 2026/27, where the US-UK treaty helps, where it does not, and how to sequence withdrawals so that you pay one layer of tax rather than two.
How Flexi-Access Drawdown Works Under UK Rules
Flexi-access drawdown has existed since 6 April 2015, when the Taxation of Pensions Act 2014 removed the old caps on income withdrawal. You "designate" part or all of your uncrystallised money purchase fund into a drawdown fund. At that moment, you may take a pension commencement lump sum of up to 25% of the amount designated. The rest stays invested in flexi-access drawdown, and you withdraw as much or as little as you like, whenever you like. The government's MoneyHelper guide to pension drawdown gives a neutral overview of the UK mechanics. HMRC's Pensions Tax Manual guidance on drawdown pension confirms that drawdown can only be paid from money purchase or cash balance arrangements, never from a defined benefit scheme.
Every payment out of the drawdown fund is taxable UK pension income at your marginal rate. Furthermore, HMRC's Employment Income Manual on registered pension schemes confirms that normal minimum pension age is 55 and will rise to 57 from 6 April 2028. That change matters to Americans in their early fifties who are planning an exit date around a relocation.
Why the IRS Ignores the Tax-Free Label
The United States does not follow British pension law. Instead, it treats a UK registered pension as a foreign, non-qualified retirement arrangement. Therefore, a distribution from flexi-access drawdown is taxed under the ordinary annuity and distribution rules of the Internal Revenue Code, and the UK label "tax-free" carries no weight on its own. Only the US-UK treaty can change that result, and, as we explain below, whether it does depends almost entirely on where you live when the money comes out.
How HMRC Taxes Flexi-Access Drawdown in 2026/27
The UK side is the more mechanical of the two, but it contains three traps that routinely catch American clients. Moreover, each trap has a US knock-on effect, because the amount and timing of UK tax decide how much foreign tax credit you can claim.
Designation, Tax-Free Cash and the £268,275 Lump Sum Allowance
When you designate funds into flexi-access drawdown, the pension commencement lump sum is limited to 25% of the amount designated. However, since the lifetime allowance was abolished on 6 April 2024, there is also a personal cap on all tax-free lump sums: the lump sum allowance of £268,275, unless you hold a protection. HMRC's page on individual lump sum allowances sets out the rules. Therefore, a client with a £1.6 million SIPP cannot take £400,000 tax-free; the ceiling is £268,275 across all schemes combined.
Importantly, you do not have to move everything into flexi-access drawdown at once. You can designate in tranches, taking 25% of each tranche tax-free until the allowance is used. For Americans using flexi-access drawdown, that phasing is the single most valuable planning tool, because it lets you choose which tax year, and which country of residence, the tax-free cash falls into.
Emergency Tax and the P55 Reclaim
The first taxable payment from flexi-access drawdown is usually taxed on an emergency code on a Month 1 basis. HMRC's PAYE Manual on flexibly accessed pension payments explains that the provider applies the emergency code to the first payment where it holds no current code. The effect is brutal on a large one-off withdrawal. The system assumes you will receive the same sum every month, so it gives you only one-twelfth of the personal allowance and the basic rate band.
For example, a single £100,000 taxable withdrawal on a 1257L Month 1 code suffers roughly £43,400 of PAYE. If that is your only income in 2026/27, however, your true liability is about £27,400. You can reclaim the difference during the year using form P55 for a flexibly accessed pension overpayment, or P53Z or P50Z if you have emptied the pot. HMRC's Self Assessment Manual on in-year repayments adds that non-residents may also reclaim, but must first decide whether to claim treaty relief.
The US point is subtle. The IRS credits only the UK tax you are finally liable for, not the tax withheld. So an over-withheld £16,000 is not creditable until the refund position is settled, and claiming a credit for the full PAYE figure overstates your Form 1116.
The Money Purchase Annual Allowance Trigger
Your first taxable payment from flexi-access drawdown also triggers the money purchase annual allowance. From then on, tax-relieved contributions to defined contribution schemes are capped at £10,000 a year, rather than £60,000. Taking only the tax-free lump sum does not trigger it. HMRC's guidance on checking whether you have exceeded the money purchase annual allowance confirms that your provider must send a flexible access statement within 31 days.
For an American still working in London, the trigger has a treaty consequence as well. Article 18(5) of the treaty only shelters UK pension contributions from US tax to the extent they qualify for UK relief. Contributions above the £10,000 limit therefore lose both UK relief and US protection. Our UK pension annual allowance calculator models the taper and the treaty ceiling together.
UFPLS or Drawdown: Why the Choice Matters
There is a second route to flexible access: the uncrystallised funds pension lump sum, or UFPLS. Instead of designating funds, you take a lump sum straight from the uncrystallised pot, and 25% of each payment is tax-free. In UK terms, UFPLS and flexi-access drawdown can produce similar results. For a US resident, however, they can fall under different treaty articles, because a UFPLS is by definition a lump sum. We return to that distinction in the treaty section, since it can decide which country taxes 75% of every withdrawal.
How the IRS Taxes Drawdown Withdrawals
From the American side, three questions decide the answer. What is your investment in the contract, or basis? Does any penalty apply? And at what exchange rate do you convert the payment?
Section 72, the General Rule and Your Basis
A distribution from a UK scheme is taxed under section 72 of the Internal Revenue Code. You may exclude only your "investment in the contract", meaning amounts you contributed that were already taxed in the United States. Because a UK pension is not a qualified plan, the Simplified Method does not apply. Instead, periodic payments use the General Rule described in IRS Publication 939, and irregular withdrawals are generally taxed first as income to the extent the fund exceeds your basis.
For most US citizens who lived in Britain while contributing, basis is close to zero. That is because Article 18(5) of the treaty excluded those contributions from US income in the first place. You cannot exclude them twice. Consequently, the tax-free cash from flexi-access drawdown is, in most cases, fully taxable in America unless a treaty article removes it.
The Section 72(w) Trap for Britons Who Moved to America
A British national who later becomes a US resident faces a separate problem. Section 72(w) strips out of basis any employer or employee contribution made while you were a nonresident alien, where the contribution was not subject to income tax in the United States or any foreign country. Because UK pension contributions receive UK tax relief, almost every contribution you made before arriving in America is caught.
In practice, that means a Briton on a green card cannot claim that decades of UK-relieved contributions are a tax-free return of capital. The whole withdrawal is potentially taxable in the United States, subject to the treaty. This is one of the most common errors we see on returns prepared by US preparers unfamiliar with British pensions.
No 10% Early Withdrawal Penalty
Americans often worry that taking flexi-access drawdown at 55 triggers the 10% additional tax on early distributions. It does not. Section 72(t) applies only to qualified retirement plans as defined in section 4974(c), and a UK registered pension is not one of them. Nevertheless, the absence of a penalty does not make an early withdrawal cheap, because the full US marginal rate still applies to the taxable amount.
Converting Sterling to Dollars
You report every withdrawal in US dollars. For a one-off lump sum, the defensible rate is the spot rate on the day you received it. For regular monthly income, the IRS yearly average currency exchange rates are generally accepted; the 2025 average was 0.759 pounds per dollar. Whichever method you use, apply it consistently to both the income and the UK tax, otherwise your foreign tax credit will not match your income.
The Treaty Question: Where You Live Changes Everything
The US-UK double taxation convention, whose full text and 2002 Protocol are also published by the US Treasury, contains two pension articles. Article 17 decides which country taxes a pension or lump sum. Article 18 governs contributions and the growth inside the scheme. However, the savings clause in Article 1(4) lets the United States tax its citizens and residents as if the treaty did not exist, except where Article 1(5) carves a provision back in. The carve-outs include Articles 17(1)(b), 17(3), 18(1), 18(5) and 24, but not Article 17(1)(a) or 17(2).
US Citizens Resident in Britain and the Savings Clause
If you are a US citizen living in the UK, Article 17(1)(a) gives the UK the right to tax your pension as your country of residence. Because 17(1)(a) is not carved out of the savings clause, the United States taxes the same flexi-access drawdown income again. Relief comes only through the foreign tax credit, with the UK as the primary taxing country. IRS Publication 514 on the foreign tax credit for individuals explains how that credit is computed.
The tax-free cash is the problem. Article 17(1)(b) exempts pension income that would be exempt in the other country, but it only covers a scheme established in the other state. For a UK resident drawing from a UK scheme, that condition fails. Therefore, the pension commencement lump sum is tax-free in Britain, fully taxable in America, and carries no UK tax to credit. Our earlier guide on how wealthy dual filers plan for receiving a UK pension covers the lump sum from the UK resident's side.
US Residents and Article 17(1)(a)
Once you live in the United States, the position flips. Article 17(1)(a) now gives America the exclusive right to tax pension income, and the UK must exempt it. HMRC's own example in its Residence and FIG Regime Manual on temporary non-residence describes a £300,000 flexible drawdown paid to a non-resident on which no UK tax was due under the relevant treaty. To stop the provider deducting PAYE, you file HMRC form US-Individual 2002, with US residency certification, and HMRC issues an NT code.
However, the same manual page carries a warning. If you return to the UK within five years, flexible drawdown taken while non-resident is taxed as if received in the year you come back. Americans who move to Florida, draw heavily and then return to London for family reasons can find a large UK bill reappearing years later.
The Article 17(1)(b) Argument for Tax-Free Cash
For a US resident, Article 17(1)(b) becomes available, because the UK scheme is now established in the other state. It exempts from US tax any pension amount that would be exempt in the UK if you were UK resident. Because Article 17(1)(b) is carved out of the savings clause, many practitioners take the position that the 25% pension commencement lump sum is excluded from US income even for a US citizen living in America.
That position is not settled. Article 17(2) separately allocates lump sums, and it opens with "notwithstanding paragraph 1", which the IRS could argue displaces 17(1)(b) entirely. The IRS has not ruled publicly. Consequently, anyone claiming the exclusion should disclose it on Form 8833, the treaty-based return position disclosure, and should model the outcome if the claim is refused.
Why a UFPLS May Fall Under Article 17(2)
Article 17(2) says a lump sum from a UK scheme paid to a US resident is taxable only in the UK. For the tax-free quarter that costs nothing. For the taxable 75% of a UFPLS, however, it may mean HMRC keeps the right to tax at up to 45%, while the savings clause still lets America tax a US citizen too. By contrast, regular payments from flexi-access drawdown are pension income under 17(1)(a), which the UK must exempt for a US resident. For that reason, we generally recommend that clients who expect to be US resident use flexi-access drawdown rather than repeated UFPLS withdrawals.
Making the Foreign Tax Credit Work
When both countries tax the same withdrawal, the foreign tax credit on Form 1116 is the mechanism that removes the second layer. Done well, it eliminates double tax completely. Done badly, it strands credits for a decade.
The General Basket and Old Carryforwards
Pension income attributable to past employment normally sits in the general category basket, alongside salary and bonuses. That matters enormously for a former City professional. Years of UK salary taxed at 45%, against a top US rate of 37%, usually leave large unused general-category credits. Under section 904(c), those excess credits carry back one year and forward ten.
Here is the flexi-access drawdown planning insight most guides miss. Tax-free cash from flexi-access drawdown is UK-source general income with no UK tax attached. It therefore expands your credit limitation without consuming any fresh credit, which makes it the ideal place to absorb old carryforwards before they expire. Timing the lump sum into a year when expiring credits are available can reduce the US tax on it to zero.
The Tax-Year Mismatch
The UK tax year runs from 6 April to 5 April; the US year follows the calendar. A flexi-access drawdown withdrawal in February 2027 falls into the UK 2026/27 year but the US 2027 year. As a result, the UK tax and the US income can sit in different years unless you match them carefully. Cash-basis filers claim credits when the tax is paid, which pushes UK balancing payments into the following US year. An accrual election under section 905(a) generally aligns them better, but it is irrevocable, so it needs thought before it is made.
State Tax Does Not Follow the Treaty
Federal treaty relief does not bind most states. California, for instance, taxes UK pension income without regard to the treaty and gives no credit for UK tax, as our guide to California tax on UK pensions explains. Florida and Texas, by contrast, levy no personal income tax, which is why so many flexi-access drawdown plans end with a move to one of them. The ICAEW's tax faculty resources track UK-side changes that affect these plans.
Reporting the Drawdown Fund: FBAR, Form 8938, PFIC and Form 3520
Withdrawals are only half the compliance picture. The drawdown fund itself sits inside several US information-reporting regimes, and missed reporting is where the largest penalties arise.
FBAR and Form 8938
A SIPP or personal pension in flexi-access drawdown is a foreign financial account. If your foreign accounts together exceed $10,000 at any point in the year, you must file an FBAR through FinCEN's foreign bank account reporting page. The pension is also a specified foreign financial asset for Form 8938. Living abroad, the thresholds are $200,000 at year end or $300,000 at any time for a single filer, and double that for joint filers. Living in America, they fall to $50,000 and $75,000. Our FBAR and FATCA compliance service handles both.
Article 18(1) Growth Deferral and PFIC Relief
Growth inside a flexi-access drawdown fund is not taxed annually by the IRS. Article 18(1) defers US tax on the scheme's income until it is paid out, and this article is carved out of the savings clause. Moreover, the PFIC rules largely fall away for the funds inside a SIPP. Treasury Regulation 1.1298-1(c)(4) removes the Form 8621 filing requirement for PFICs held through a pension fund that a treaty treats as taxable only on distribution.
Form 3520 and Revenue Procedure 2020-17
A UK pension in flexi-access drawdown is technically a foreign trust for US purposes. However, Revenue Procedure 2020-17 exempts eligible tax-favoured foreign retirement trusts from Forms 3520 and 3520-A. Most UK registered schemes meet its conditions, but a large personal contribution in a single year can breach the limits, so it is worth checking before relying on the exemption.
When Earlier Years Were Missed
Many Americans discover these rules only when they start flexi-access drawdown, because the provider's paperwork prompts a first proper look at the pension. If earlier FBARs omitted the SIPP, or earlier US returns ignored a lump sum, the right fix depends on whether the failure was non-wilful. Our US tax returns for expats service and IRS Streamlined filing service cover catch-up filings, and the valuation of UK pensions for FBAR and Form 8938 is often the first figure we have to reconstruct.
Case Study: Sequencing Flexi-Access Drawdown Around a Move to Florida
Daniel is a US citizen, aged 57, who has lived in London since 2008. He retired in 2026 as a managing director at an investment bank, with a SIPP worth £1.2 million, built entirely from UK-relieved contributions. He therefore has no US basis. He plans to move to Florida in 2028. Thanks to years of UK tax at 45%, he also holds about $180,000 of unused general-category foreign tax credits from 2017 to 2025. All figures below are illustrative, use an assumed rate of $1.30 to the pound, and use 2026 single-filer federal brackets.
The Default Plan: Designate Everything in 2026
Daniel's provider suggests designating the whole fund into flexi-access drawdown in 2026. That produces the maximum pension commencement lump sum of £268,275, which is capped by the lump sum allowance, or $348,758. He also takes £100,000 of taxable drawdown income, or $130,000, in August 2026.
On the UK side, the lump sum is tax-free, and the £100,000 carries final UK tax of about £27,400, or $35,662. However, the emergency code withholds around £43,400, so Daniel files a P55 to recover roughly £16,000. On the US side, his 2026 federal tax on both amounts is roughly $130,000. The UK tax credits $35,662, leaving about $95,000. Because both amounts are UK-source general income, his carryforwards absorb the rest. His US bill is nil, but he has spent about $95,000 of credits on tax-free cash.
The Sequenced Plan: Designate in Two Tranches
Instead, we recommended that Daniel designate £600,000 in 2026, taking £150,000 tax-free, or $195,000, plus the same £100,000 of income. His 2026 US tax falls to roughly $77,000. After the $35,662 UK credit, about $41,000 remains, and carryforwards absorb it, leaving roughly $139,000 of credits unused.
After moving to Florida in 2028, Daniel designates the remaining £600,000. His unused lump sum allowance is £118,275, or about $153,758. As a US resident, he claims the Article 17(1)(b) exclusion on Form 8833. If the claim succeeds, that cash escapes US tax altogether, which saves roughly $54,000 at a 35% marginal rate. If the IRS rejects it, the remaining carryforwards still cover the tax, provided they have not expired.
Income After the Move
Meanwhile, Daniel files form US-Individual 2002 before his first US-resident flexi-access drawdown payment, and HMRC issues an NT code, so his later drawdown income carries no UK tax under Article 17(1)(a). The IRS taxes it, and Florida levies no income tax. Because the pension is still UK-source income, his remaining 2017 to 2025 credits can offset the US tax on it until each year's credit expires. Consequently, sequencing turned a single-year lump sum into a decade of largely sheltered withdrawals. The one condition is that Daniel must stay non-UK resident for more than five full years, or the temporary non-residence rule will pull his drawdown back into UK tax.
How TaxYork Can Help
TaxYork prepares combined US and UK returns for Americans who hold substantial British pensions, and flexi-access drawdown is one of the areas where joined-up preparation pays for itself. We model designation tranches across both tax years, reconcile emergency PAYE with your final UK liability, and prepare the Form 1116 that uses your carryforwards in the right order.
Furthermore, we file the treaty disclosures, including Form 8833 where an Article 17(1)(b) or Article 18(1) position is taken, and the HMRC forms needed to secure an NT code after a move. We also report the pension correctly on your FBAR and Form 8938 each year. Where earlier years were missed, our tax treaty optimisation service and catch-up filing team work together, so that the corrected history supports your current planning rather than undermining it.
Conclusion
Flexi-access drawdown gives Americans with UK pensions real control over timing, but the two tax systems reward that control only if you use it deliberately. For a US citizen living in Britain, the tax-free cash is fully taxable in America, and only old foreign tax credits or careful timing make it cheap. For a US resident, Article 17(1)(a) moves taxing rights to America, and Article 17(1)(b) may shelter the tax-free cash, although that position needs disclosure.
The practical flexi-access drawdown lessons are consistent. Designate in tranches rather than all at once. Reclaim emergency tax quickly and credit only the final UK liability. Prefer designated drawdown to repeated UFPLS payments if you expect to live in America. Above all, map your foreign tax credit carryforwards before you take a penny, because they are often worth more than any other planning step.
Contact Us
If you are planning flexi-access drawdown from a UK pension, or you have already started and are unsure whether your US returns and FBARs are right, book a consultation with our US-UK team. You can also email hello@taxyork.com or call 020 3488 8606. We will review your pension, your residence plans and your credit position, and give you a clear sequence for every withdrawal.
Disclaimer
This article provides general information about the US and UK taxation of flexible pension withdrawals for US citizens, green card holders and US residents with UK pensions. It does not constitute tax, legal or financial advice, and you should not rely on it for any specific transaction. The case study is illustrative, uses an assumed exchange rate and simplified federal brackets, and your outcome will depend on your residence history, scheme rules and credit position. Accordingly, you should obtain professional advice tailored to your circumstances before designating funds or taking withdrawals. TaxYork accepts no liability for any loss arising from reliance on this material.