Best ways to invest / pension as American in UK

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USA I would think the brokerage holding the 401k or IRA would receive the forms and ensure that the correct amount is withdrawn every year for the 5 years a 72(t) runs, and the 1099-R produced each year would have the correct code indicating a qualified 72(t) withdrawal.

My thoughts too... I guess you'd need to disclose to your accountant that you've taken a distribution prior to age 59.5 from your U.K Personal Pension. I'm personally looking to purchase a lifetime annuity and i'm not 59.5 at this time. With a possible relocation back to the U.S, one thing is for sure, you can't purchase an annuity in the U.K. unless you're a resident. The annuity would satisfy:
'a series of equal and periodic payments over your life expectancy, or over the life expectancy of you and your beneficiary' https://www.efile.com/tax-penalty-early-retirement-withdrawals-distributions/

I may part with some $$$ to get a definitive from an specialist international expat accountancy firm.

@Barcrest - comments in relation to the 25% tax free lump sum - I do think there's a tendency to overthink some of these things and ultimately live in fear of the thud on the doormat as that letter from the IRS comes through the letterbox! - I've had my own experience of that (see some of my other posts - very unnerving, but the IRS was wrong, I fought it and won and saved myself $30k on an incorrect AMT passement on a UK Capital Gain)

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.

@tubaleiter is correct when he states:

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%.

I disagree however on the simple maths of taking the full lump sum in one go:

Here's a couple of calculators to help illustrate the point:

UK Calculator https://www.which.co.uk/money/pensions-and-retirement/pensions-retirement-calculators/pension-tax-calculator-af1sc5u1y9mc

US Calculator https://www.forbes.com/advisor/income-tax-calculator/

As an example (basic, assuming just the lump sum as income) - a UK £500K lump sum - £375k is taxable and results in a UK tax liability of £153,710 - or $184k @£1=$1.20

That same £500k is $600k and that results in a US Federal Tax liability of (assumed married) of $150k - so $34k that can then be used to carry forward in your carryover worksheets.

Then of course, there's any accumulated and un-utilised foreign taxes brought forward form the previous 10 years. I can't currently think of any circumstances where a US tax liability could arise on UK lump sum, other than a dramatic strengthening of the £ rate against the dollar. Using the calculators noted above, breakeven occurs at about £1=$1.40

My biggest concern would be avoiding the UK income tax on the 75% portion that is taxable, and here I agree with @tubaleiter that flexi-access drawdown is the best method - it really depends on your own 'pain threshold' of how much UK income tax you're prepared to pay.

I wonder if a U.K pension would be subject to RMD’s? Just a thought while on topic, but likely over thinking!

I wonder if a U.K pension would be subject to RMD’s? Just a thought while on topic, but likely over thinking!

I doubt it very much.  I don’t even know the UK rules regarding SIPPs as I don’t have any.  Are you required to begin drawdown before a certain age? I can’t see HMRC allowing SIPPs to remain tax deferred without limits. I do know that in the calculation of inheritance tax that SIPPs are exempt, and that the residue of a SIPP can be passed to a beneficiary these days without requiring the SIPP to be cashed out.

I'm not aware of any minimum drawdown requirements for a SIPP.

On death, the SIPP can be transferred - under the age of 75 and it's tax free, over 75 and it's treated as income (subject to marginal rate of tax) of the inheritor. As it's a trust, it typically sits outside of an estate for Inheritance Tax purposes.

I doubt it very much.  I don’t even know the UK rules regarding SIPPs as I don’t have any.  Are you required to begin drawdown before a certain age? I can’t see HMRC allowing SIPPs to remain tax deferred without limits. I do know that in the calculation of inheritance tax that SIPPs are exempt, and that the residue of a SIPP can be passed to a beneficiary these days without requiring the SIPP to be cashed out.

I meant from an IRS perspective. Talk of the IRS applying the same rules, (perhaps) to U.K pension plans, such as penalties prior to 59.5 etc, how far would they look to align? As I said overthinking this.

I meant from an IRS perspective. Talk of the IRS applying the same rules, (perhaps) to U.K pension plans, such as penalties prior to 59.5 etc, how far would they look to align? As I said overthinking this.

I said in my reply “I doubt it” then moved onto the UK rules. Sorry about the diversion 

I’m sure you are overthinking it. RMDs apply to qualified, before tax, DC pension plans In the USA. RMDs don’t even apply to USA Roth IRAs until they have been inherited by a non-spouse.

It’s all academic to me as my wife and I don’t have a SIPP or even an IRA as we converted them to Roths over the 12 years since we retired.

My thoughts too... I guess you'd need to disclose to your accountant that you've taken a distribution prior to age 59.5 from your U.K Personal Pension. I'm personally looking to purchase a lifetime annuity and i'm not 59.5 at this time. With a possible relocation back to the U.S, one thing is for sure, you can't purchase an annuity in the U.K. unless you're a resident. The annuity would satisfy:
'a series of equal and periodic payments over your life expectancy, or over the life expectancy of you and your beneficiary' https://www.efile.com/tax-penalty-early-retirement-withdrawals-distributions/

I may part with some $$$ to get a definitive from an specialist international expat accountancy firm.

I do think that you may be overthinking it!

Following my earlier thread on the actual tax calculations, I think you may find that even if a distribution from a UK pension before the age of 59.5 is deemed taxable in the US, the US tax payable will most likely be less than the UK tax payable on the 75% taxable portion (based on current exchange rates) and therefore you can use your FTC to eliminate any tax payable to the IRS. If that's the case, paying good (after tax money) to an advisor may be unnecessary 

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.

I think you'd have to do it all manually - it'd be a faff for sure. And not entirely clear if it's even required, or you just follow the UK rules and you're fine. Definitely an open question for me!

I disagree however on the simple maths of taking the full lump sum in one go:

Here's a couple of calculators to help illustrate the point:

UK Calculator https://www.which.co.uk/money/pensions-and-retirement/pensions-retirement-calculators/pension-tax-calculator-af1sc5u1y9mc

US Calculator https://www.forbes.com/advisor/income-tax-calculator/

As an example (basic, assuming just the lump sum as income) - a UK £500K lump sum - £375k is taxable and results in a UK tax liability of £153,710 - or $184k @£1=$1.20

That same £500k is $600k and that results in a US Federal Tax liability of (assumed married) of $150k - so $34k that can then be used to carry forward in your carryover worksheets.

Then of course, there's any accumulated and un-utilised foreign taxes brought forward form the previous 10 years. I can't currently think of any circumstances where a US tax liability could arise on UK lump sum, other than a dramatic strengthening of the £ rate against the dollar. Using the calculators noted above, breakeven occurs at about £1=$1.40

My biggest concern would be avoiding the UK income tax on the 75% portion that is taxable, and here I agree with @tubaleiter that flexi-access drawdown is the best method - it really depends on your own 'pain threshold' of how much UK income tax you're prepared to pay.

I agree with, in general. Your math for taking out a lump sum where 25% of it is tax free matches mine (and with today's exchange rate, it's a comfortable margin before any US tax would be due).

The challenging scenario is where somebody takes only the 25% tax-free lump sum up front, without any of the taxable portion.. Then you've got a US taxable income but no UK tax to offset it against - that's where you get into US tax pain.

So I think that makes the general advice for a defined contribution pension to be: 1. Do NOT take 25% tax free up front 2. DO take it in chunks where 25% is tax free, and the UK tax on the 75% offsets US tax on the 100%.

So I think that makes the general advice for a defined contribution pension to be: 1. Do NOT take 25% tax free up front 2. DO take it in chunks where 25% is tax free, and the UK tax on the 75% offsets US tax on the 100%.

The only caveat to this would be if you have accumulated FTC's brought forward over the previous 10 years that can be used to offset any US tax due on any 25% tax-free lump sum taken (through drawdown) - this is especially true if there are FTC's about to expire. not forgetting also that either the US or UK governments may choose to change the rules at any time - especially if either of them needs to scrape the barrel to raise more income.

As an example, I have $33k of FTC's from 2014 so I need to consider if it's worth taking some of the 25% tax-free lump sum to utilise these FTC's. A lot of number crunching required in the meantime! 

Hi all, this post has been super informative but I don't understand most of this.

As I've outlined in other posts I'm an accidental American who is now dealing with the tax consequences. Through a family member recommendation I have access to a USA based tax account who has got me tax and FBAR compliant, including most recently on my pension report via FBAR.

My circumstances have changed in the last few weeks. I have been saving for a deposit for a house in the UK and my access to a mortgage has been affected by the recent UK government announcements and inflation. So I want to invest my money in the meantime (say 5 -10 years). I have circa $50,000 dollars which I could invest, which I could add about $7,000 to each year. I know nothing about investing but again through an American family member I have access to an investment firm. USA based investment firm that is trusted by the family for the last 30 years. They have indicated that they would take me on as a client with the circa $50k I have.

I have an address I could use in the USA so I think that gets me around some of the issues.

Basically my question is where can I go for help on this matter? I am willing to pay a professional who has experience of dealing with USA citizens investing from the UK. For clarity I do have a 401k style UK pension which I do contribute to.

Hi Dano, if you are a first time buyer have you opened a Lifetime ISA?

Here are a few groups that may be helpful to you:

https://www.facebook.com/groups/AmericanExpatriates - 8,000+ members
https://www.facebook.com/groups/accidental.americans - 1,500 members
https://www.facebook.com/groups/uk.accidental.americans/ - 176 members

Best of luck

Hey Lionheart, thanks for your input. I should have added I have a property in Ireland. an added complication to throw into the mix.

However i though US citizens couldnt access ISAs

A safe place to invest a lot of money is NS&I which is backed by the UK Treasury. Only in recent years did it open up to USCs in the USA. With exchange rates as good as they are in favour of the USD it may be wise to keep GBPs as well.

https://www.nsandi.com/products