Best ways to invest / pension as American in UK

Hello,

I am currently on the spousal visa and will get the ILR and citizenship in 2024. My husband (who is a British citizen) and I are trying to figure out what is best to do in regards to investments (such as a private pension and/or other) for me as an American citizen while being aware of tax implications. What have you found works best in this scenario and should or would that change after becoming a UK citizen?  Thanks so much.

First question is are you employed?

If you're employed, then the obvious place to start is with a work related pension and you shouldn't have to wait until you get UK citizenship to start contributing. Generally because of employer matching contributions and the tax relief you receive on your own contributions, the combined benefits are hard to beat.

if you're not employed then your options become more limited - but even here, you can set up and contribute to a private pension (maximum annual contribution is £2,880) and you'll receive tax credits into he pension as if you were a 20% tax payer - so maximum annual contribution becomes £3,600. The only challenge you may face is finding a pension provider that will accept you as a USC - many won't (because of the IRS reporting requirements) but there are some that will - watch out for the fees however.

Good luck.

Whatever you do, make sure you never have your name on a stocks and shares ISA.  Cash ISA is fine.  Stocks and shares is bad!

I assume you'll remain a U.S. Citizen once you become a U.K national.... Unless you desire untold headaches, (who does), then keep investments in regular bank interest accounts and ISA's as commented in the previous post. You will find however, (like I have done recently), a good number of banks/building society's wont take on U.S. Citizens. Weirdly, some of the better known out there will not, whereas the smaller, 'who are they' will. Check the T&C's before applying to save time. Always check the insured status of the institution and stay clear of some banks in the Channel Islands/Isle of Man that aren't covered by U.K law. Premium Bonds from NS&I can also give the opportunity to win prizes (top £1,000,000), whereas you keep your investment safe, so it's not gambling income.

Work pensions are mandatory in the U.K, except for limited circumstances. You may however opt out. As far as personal pensions are concerned, take a look at the U.K Governments official website: https://www.moneyhelper.org.uk/en A great resource on pensions and other things of a financial nature. I've not heard of any pension provider turning down a U.S.C who would like to open a personal pension, as there are U.K. laws on residency rather then citizenship. You may well fall foul of the investment vehicles though and because of this it would not be possible in some cases to operate a certain plan, (likely SEC rules). Again check with the the site and set up a free call, they're very knowledgeable and can give excellent guidance. An Independence Financial Advisor (often at cost) will advise the way forward too.

My son is a dual UK US citizen living and working in the UK since 2017. His employer pays into an employer pension plan similar to a 401k. He contributes to match the employer contributions. Like us his other UK savings avoid any investment in funds, and sticks to savings and individual interest bearing bonds.

It's all a bit of a minefield - you've got competing, incompatible rules in each country (MiFiD/PRIIPs, PFIC, HMRC reporting, FATCA, etc.). But there are reasonable paths through it, without doing too much paperwork or paying extra taxes! Although I will warn that there are plenty of grey areas where even the experts don't agree (and I'm just an educated amateur )

First stop would be a UK pension - workplace pension if you have it, SIPP if not (some grey area on the SIPP, but pretty confident it's ok). At the very least up to the employer match (free money!), but also as a primary investment vehicle for retirement. Tax advantaged in both countries, no PFIC issues so you can buy whatever funds are offered by your provider, it's ideal. Finding a UK broker who will open a SIPP for a US citizen can be a challenge; I know Hargreaves Lansdown will, there are likely a couple others, but not most (thank FATCA).

My second preference is a US Roth IRA. Also tax advantaged in both countries, no PFIC issues either. MiFiD/PRIIPs can get in the way of buying US funds, so you may wind up having a US IRA but buying UCITS funds in it. Typically this would be a big red flashing PFIC warning, but the IRA wrapper means it doesn't matter. Probably only Interactive Brokers will allow you to open an IRA using a UK address AND buy non-US funds inside it, but it's all above board.

After that, many people would look to a UK Stocks & Shares ISA - but BIG PFIC WARNING applies here. The US DOES NOT recognize the ISA as a tax-advantaged account - to the IRS, it's just a taxable brokerage account, and any non-US funds you buy in an ISA will be taxed as a PFIC, with punitive tax rates and extremely onerous filing requirements. Unless you really know what you're getting yourself into, DO NOT BUY A FUND IN AN ISA. Individual stocks are fine, if you're comfortable managing them, filing US taxes on dividends and capital gains, etc. Same challenges on finding a broker, too: Hargreaves Lansdown and Interactive Brokers definitely work with US citizens, likely a few others out there. Cash ISA is fine, but interest is US-taxable and usually worse than a savings account - unless you have a LOT of interest, you're better off with the highest rate savings account you can find.

Stocks & Shares LISA is the same concern as an ISA. The UK government 25% top-up is nice, although US taxable. Cash LISA is fine for saving for a house; wouldn't want to leave long-term investments in cash like that.

That pretty much leaves taxable brokerage accounts, either in the US or UK. Same tax rules apply regardless of where the account is open - avoid PFICs! If you can use a US address to open one, it may make it simpler to buy US funds (non-PFIC), and you'd want to pick HMRC reporting funds (https://www.bogleheads.org/wiki/Vanguard_US_domiciled_ETFs_that_are_UK_HMRC_reporting_funds) to avoid punitive UK tax. If you use a UK account, or even a US account but with UK address, you'll likely be barred from buying US funds, and you don't want non-US PFIC funds, so you're stuck with individual stocks. Or you can get a bit exotic by buying and exercising options to get the underlying.

That high-level summary ignores some of the more exotic options like HSA, 529, VCT, EIS, SEIS, IF ISAs, etc., but you likely don't want to mess with any of those. And there are plenty of nuances with all of these options - I urge you to do your research before investing, but hopefully this is a starting point

This is all brilliant and so helpful - thank you everyone for your comments. I really appreciate it so much- I will do my research and make educated decisions Thanks again.

This informative topic is so relevant to many U.S. Citizens & Green Card holders that are looking to invest in a pension or otherwise.

So a question to add to the post:
Come distribution time are the rules for a foreign (U.K) pension the same as if it were a U.S retirement plan such as a 401(k) or IRA? Are you subject to a 10% penalty if you take a distribution before age 59.5? Are you also subject to the 60 day rollover rules if you transfer from a pension to purchase say a retirement annuity?  How and where would the penalty be reported if relevant?
Any other tips on taking a distribution from a U.K. plan?
There’s a lot of information out there on what products to invest in and what not to, but very little when it comes to distribution time.

Finally are you limited to contributions on a U.K. pension? Must it remain within IRS limits for IRA and 401(k)

This informative topic is so relevant to many U.S. Citizens & Green Card holders that are looking to invest in a pension or otherwise.

So a question to add to the post:
Come distribution time are the rules for a foreign (U.K) pension the same as if it were a U.S retirement plan such as a 401(k) or IRA? Are you subject to a 10% penalty if you take a distribution before age 59.5? Are you also subject to the 60 day rollover rules if you transfer from a pension to purchase say a retirement annuity?  How and where would the penalty be reported if relevant?
Any other tips on taking a distribution from a U.K. plan?
There’s a lot of information out there on what products to invest in and what not to, but very little when it comes to distribution time.

Finally are you limited to contributions on a U.K. pension? Must it remain within IRS limits for IRA and 401(k)

Good questions and I don' know the answers.

I don't believe IRS rules on early withdrawal on UK pensions apply or have 60 day annuity rollover rules.  I don't know that you are allowed to withdraw from a SIPP and have it sit in your account while you decide which annuity to buy, I believe only direct rollovers to an annuity are allowed. HMRC allows drawdown from age 55 without an early withdrawal penalty and I would expect the IRS to treat it as regular income since it is from an "unqualified pension plan" in their definition.

I also don't believe IRS rules apply to how much you can contribute to a UK pensions plan which is why I advise my son to declare gross earned income on his IRS return (which he excludes anyway through FEIE). If you always declare gross earned income then any contributions are after-tax as far as the IRS is concerned.  I could be completely wrong on this of course.

I assume you'll remain a U.S. Citizen once you become a U.K national.... Unless you desire untold headaches, (who does), then keep investments in regular bank interest accounts and ISA's as commented in the previous post. You will find however, (like I have done recently), a good number of banks/building society's wont take on U.S. Citizens. Weirdly, some of the better known out there will not, whereas the smaller, 'who are they' will. Check the T&C's before applying to save time. Always check the insured status of the institution and stay clear of some banks in the Channel Islands/Isle of Man that aren't covered by U.K law. Premium Bonds from NS&I can also give the opportunity to win prizes (top £1,000,000), whereas you keep your investment safe, so it's not gambling income.

We've been moving money around again lately. Several online institutions wouldn't touch me because I'm American. So there are a couple of savings accounts just in my wife's name. Just signed up with Yorkshire Building Society though.....no problem with being American, although they did want that info.

This informative topic is so relevant to many U.S. Citizens & Green Card holders that are looking to invest in a pension or otherwise.

So a question to add to the post:
Come distribution time are the rules for a foreign (U.K) pension the same as if it were a U.S retirement plan such as a 401(k) or IRA? Are you subject to a 10% penalty if you take a distribution before age 59.5? Are you also subject to the 60 day rollover rules if you transfer from a pension to purchase say a retirement annuity?  How and where would the penalty be reported if relevant?
Any other tips on taking a distribution from a U.K. plan?
There’s a lot of information out there on what products to invest in and what not to, but very little when it comes to distribution time.

Finally are you limited to contributions on a U.K. pension? Must it remain within IRS limits for IRA and 401(k)

Probably because the contribution rules are relatively straightforward (key decision is whether to include your and/or employer contributions as income on your US taxes), but the withdrawal side gets really complex pretty quickly. Even just the UK bit (for people with no US ties) is not super simple - UFPLS vs annuity vs flexi-access drawdown, 25% tax-free lump sums, money purchase annual allowance, lifetime allowance and its crystallization events, and so on.

Add the US tax part and it's even more confusing. High level, there are two key distinctions that will inform how its taxed: 1. Did you include all contributions as income, or exclude some/all of them? If you included them in income, those contributions have already been taxed, so you build a basis in the pension. If they were excluded from income, all your withdrawals will be taxable (just like a US 401k - this isn't a bad thing, just need to be clear). 2. Are you taking periodic payments, like an annuity or regular flexi-access drawdown? If so, these follow the "general rule" in IRS pub 939. Or are you taking non-periodic payments, like UFPLS or nonperiodic flexi-access drawdown? If so, use the "simplified rule" in IRS pub 575.

Not sure if it's ok for me to link my own blog (mods, happy to delete the link if not), but I wrote a post exploring those two rules in more detail - it's complicated enough I don't want to reproduce here: https://fireacrossthepond.wordpress.com/2021/05/26/tax-on-uk-pension-withdrawals/

As far as limits to contributions, if you choose to exclude them from US taxable income, you're limited to the 401k limits. What I haven't been able to find a straight answer on is if there are any adverse consequences to exceeding the 401k limit if you include your/employer contributions in your income, and thus pay tax on them. I could imagine some kind of consequence where the tax deferral is impacted, but have no real idea.

Article 15 Para 5b could apply, but how it applies is clear as mud to me:

(b) The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the United States to its residents for contributions to, or benefits accrued under, a generally corresponding pension scheme established in the United States.

Probably because the contribution rules are relatively straightforward (key decision is whether to include your and/or employer contributions as income on your US taxes), but the withdrawal side gets really complex pretty quickly. Even just the UK bit (for people with no US ties) is not super simple - UFPLS vs annuity vs flexi-access drawdown, 25% tax-free lump sums, money purchase annual allowance, lifetime allowance and its crystallization events, and so on.

Add the US tax part and it's even more confusing. High level, there are two key distinctions that will inform how its taxed: 1. Did you include all contributions as income, or exclude some/all of them? If you included them in income, those contributions have already been taxed, so you build a basis in the pension. If they were excluded from income, all your withdrawals will be taxable (just like a US 401k - this isn't a bad thing, just need to be clear). 2. Are you taking periodic payments, like an annuity or regular flexi-access drawdown? If so, these follow the "general rule" in IRS pub 939. Or are you taking non-periodic payments, like UFPLS or nonperiodic flexi-access drawdown? If so, use the "simplified rule" in IRS pub 575.

Not sure if it's ok for me to link my own blog (mods, happy to delete the link if not), but I wrote a post exploring those two rules in more detail - it's complicated enough I don't want to reproduce here: https://fireacrossthepond.wordpress.com/2021/05/26/tax-on-uk-pension-withdrawals/

As far as limits to contributions, if you choose to exclude them from US taxable income, you're limited to the 401k limits. What I haven't been able to find a straight answer on is if there are any adverse consequences to exceeding the 401k limit if you include your/employer contributions in your income, and thus pay tax on them. I could imagine some kind of consequence where the tax deferral is impacted, but have no real idea.

Article 15 Para 5b could apply, but how it applies is clear as mud to me:

Very interesting Blog and reply tubaleiter, thank you. So lets say the annuity is a level and periodic. The amount of the distribution is fully taxable, just like a regular 401(k) or traditional IRA. I assume the 'general rule' and  'simplified rule' would not apply in this case as 100% of the distribution is fully taxable? What's your thoughts on a potential of an early withdraw penalty of 10% if distributions are taken prior to 59.5, (talking of a U.K personal pension - so no rule of 55 - if that did apply to a U.K work pension - more complexities!). MPAA rules can be challenging too, although providing your don't flexabally access the 'pension pot', then you're ok with a level life annuity. The 25% tax free commencement lump some is an area i've not been able to clarify with regards it being subject to tax by the IRS or not. The simplest option is not to take that 25%, then you're in the clear going forward.

The following article may have been referred to previously but it does give quite a succinct and useful synopsis of their professional opinion concerning US taxation of UK pensions:

https://www.goldinglawyers.com/us-tax-treatment-uk-pension-plan/

Very interesting Blog and reply tubaleiter, thank you. So lets say the annuity is a level and periodic. The amount of the distribution is fully taxable, just like a regular 401(k) or traditional IRA. I assume the 'general rule' and  'simplified rule' would not apply in this case as 100% of the distribution is fully taxable? What's your thoughts on a potential of an early withdraw penalty of 10% if distributions are taken prior to 59.5, (talking of a U.K personal pension - so no rule of 55 - if that did apply to a U.K work pension - more complexities!). MPAA rules can be challenging too, although providing your don't flexabally access the 'pension pot', then you're ok with a level life annuity. The 25% tax free commencement lump some is an area i've not been able to clarify with regards it being subject to tax by the IRS or not. The simplest option is not to take that 25%, then you're in the clear going forward.

If you had been excluding the contributions from your US taxable income, there wouldn't be any after-tax basis in the pension, so it would all be taxable, agreed.

I haven't seen anything definitive about the IRS applying US early withdrawal rules to a UK pension. My gut feeling is that since a UK pension is a non-qualified pension anyway, these specific 401k rules don't apply, but a quick Sunday morning read of Pub 575 doesn't necessarily validate that idea. Have to leave this as one of my open questions, I'm afraid. If you wanted to be safe, you could do SEPP (72t) manually for those few years.

The general consensus seems to be that the 25% tax-free lump sum is US taxable, but there are some dissenting voices out there, so I don't consider it a completely settled question. Assuming that the 25% is US taxable, definitely makes sense not to take it as a lump sum up front, and to use either UFPLS or flexi-access drawdown. Then, 25% of your withdrawals will be UK tax free. At current tax and exchange rates, UK tax on 75% of the payment is typically a bit higher than US tax on 100% of it, so Foreign Tax Credits would probably cover the US tax on that 25%.

Great info, but I wonder how doing a 72(t) would work on a non-qualified foreign pension? What forms and validation are required to do a 72(t) with a US qualified pension and how could they be applied to a foreign pension fund drawdown? In the USA I would think the brokerage holding the 401k or IRA would receive the forms and ensure that the correct amount is withdrawn every year for the 5 years a 72(t) runs, and the 1099-R produced each year would have the correct code indicating a qualified 72(t) withdrawal.