Straw man for investing

So here's the deal and what I've found out about invetsing in the UK
as a US citizen. I'm putting up these suggestions as a "straw man"
to be picked apart and commented on.

Starting facts

US citizen, resident and ordinarily resident in UK
Investing goals, save immediatley for a car, longer term
save for a house downpayment, long long term save for retirement

Here's what I plan to do

1) Open a bank acount with the Halifax, they are big and have lots of services
I'll keep money for day to day expenses in there.

2) Mid-term savings (greater than 1 year) in an Isle of Man high interest
savings account. maybe checking too. This should be UK tax free until I remit the funds. Also I can
offset the interest with exemptions on my 1040, that's if I even come up to the
federal tax level.

3)Longer term savings (5 years for house downpayment) I'll ship back to the US
and buy funds through Fidelity. They are ok with doing this for a UK resident
you just carn't buy funds via their website you have to do it over the phone.
I want to eliminate $ vs pound fluctuations as much as possible so I'll bias my buying
to Fidelity funds with investments in UK companies or UK index iShares or EFTs.
I think gains dividends etc on these will be free of UK tax.

Its a bad idea to invest in UK mutual funds as the IRS will tax you heavily for this
as they are PFICs so that's out. I could buy shares through a UK broker, but I don't think I
will as I want to keep things relatively simple.

4) I'm going to keep contribution as much as I can to my ROTH

5) I'll have a UK pension through work (I put in 6% they put in 14%, sweet!)
but I'm still trying to understand the ins and outs. What I have learned is that
there's a reciprocal treaty between the UK and US that seems to recognise
the pensions of the other country so this looks good. This is a defined benefit
pension so I'll get squat unless I'm in the plan for quite a few years. I'm not
sure how the US taxes or views Stakeholder pensions or if its bad to hold
PFICs in them, which is what I imagine all the funds they usually offer are,
so I'm going to avoid these to and just fund my ROTH.

6) I'm not sure if its worth putting money into UK ISA's. The gains are UK
tax free, but I'm not sure they are US tax free so if that's true I think
they might be the same for tax purposes as investing in an Isle of Man
account. Also ISAs generally offer a range of funds and I'm not sure
putting PFICs in an ISA wrapper would protect you from the IRS PFIC police.

So to sum up it just seems simpler to do most of your saving and investing
back in the US, maybe if you want a pound denominated saving account do that
in the Isle of Man or Channel Islands.

Which UK company is still giving defined benefit pensions to new employees? Are you sure you are getting a DB pension? When you talk about you and your employer in a percentage of your salary, it sounds like defined contribution.

You are:
1. Dramatically over-simplifying the UK tax position.
2. Not stating what you have done with regard to estate planning.
3. Ignoring Mass. State taxes.
4. Ignoring the possibilty that you may not stay as long as you expect (say your mom or dad got ill, or you got ill, or the job went under).
5. Ignoring the possibility (judging by this site probability) that you might form a significant relationship with a Brit so circumstances may change.
The only answer is professional advice.  I agree with Sweetpeach that you may be perplexed by the USS, but you need to make long-term decisions about the investment (which can ONLY be provided by an IFA) and the tax implications.

UK companies often offer DB pension plans to employees who are over a certain age, such as 30 or 35.  It is not uncommon.  And there is often a match as well, as described by masterblaster. 

masterblaster is not - however - describing a company.  S/he is talking about the University Superannuation Scheme (USS) http://www.usshq.co.uk/  which is the UK equivalent to the TIAA-CREF plans.  Like most public sector pensions, this is typically much more generous than the private sector, which can leave US tax issues to address for which individual tax advice is helpful.

masterblaster is not - however - describing a company.  S/he is talking about the University Superannuation Scheme (USS) http://www.usshq.co.uk/  which is the UK equivalent to the TIAA-CREF plans.  Like most public sector pensions, this is typically much more generous than the private sector, which can leave US tax issues to address for which individual tax advice is helpful.

That's not clear in the original post.  I was responding to sweetpeach's comment 'Which UK company is still giving defined benefit pensions to new employees?'

There are plenty that still do.

Hi guys,

Looks like an advisor would be a goo idea, but am I doing anything right?
Sweatpeach etc. have you used an advisor, if so who, what do they charge,
I'd like to go to someone with some recommendations from the board
as its a very intimate thing to open your finances to someone.


Thnaks for the comments. The pension scheme isn't an option, it comes with the job
and anyway its 14% free money so even if its complicates taxwise at some time I'll take it.

I'm planning for the circumstances I currently see. My folks are fine and I expect to be in
the UK indefinitely, however, I've been scared off UK investments by the potential for
nasty US taxes so I'll do my investing in the States.

Estate planning is something I haven't considered, I think it can wait as I'm still
young and poor.

I should be ROR in the UK, but the MA situation is a bit of a Catch 22. From actually
reading the MA rules on domicile it looks like anyone who is currently domiciled
in MA is resident for tax purposes and has to get another domicile before they
can be considered a non-resident. So look out everyone who has MA domicile and
moves out of state for a couple of years with the intention of someday moving back
to MA

If you are not making any income from the US (you're getting paid in pounds by your emplyer in the UK) then you will get penalized for investing in a Roth IRA.  This is because you must be able to show your gross income from the US is at least as much as your Roth IRA contributions, otherwise, there is a penalty of something like 3%, basically wiping out any advantage of investing.  It will carry-over to following years as well if you don't remove the contributions.  I found this out the hard way but have removed all contributions since the last year that I was actually living in the US and, therefore, earning enough there to cover my contribution amounts.

If you are not making any income from the US (you're getting paid in pounds by your emplyer in the UK) then you will get penalized for investing in a Roth IRA.  This is because you must be able to show your gross income from the US is at least as much as your Roth IRA contributions, otherwise, there is a penalty of something like 3%, basically wiping out any advantage of investing.  It will carry-over to following years as well if you don't remove the contributions.  I found this out the hard way but have removed all contributions since the last year that I was actually living in the US and, therefore, earning enough there to cover my contribution amounts.

I thought that for the purposes of IRAs and ROTHs your income was calculated without the foreign income exclusion. I looked into rolling my IRA into a ROTH as I thought that I'd be able to do it and pay very little tax only to be told that for rollover purposes the IRS doesn't include the foreign exclusion.

There are companies that still offer DB schemes, but they are dying out and many are not offering them to new employees because it is extremely expensive for them. It just sounded a bit odd to me the way the original post was worded. I didn't know the original poster was talking about a public sector pension. Yes, they are very generous.

No I have not seen an adviser. Other priorities at the moment

I thought that for the purposes of IRAs and ROTHs your income was calculated without the foreign income exclusion. I looked into rolling my IRA into a ROTH as I thought that I'd be able to do it and pay very little tax only to be told that for rollover purposes the IRS doesn't include the foreign exclusion.

It seems that your eligibility is based on adjusted gross income after the foreign income exclusion/foreign credit.  So you may be making $50,000/year but that is totally excluded by the foreign income exclusion so you have no elibility to invest in your IRAs.
It looks like the rollover to Roth is just the opposite as you say, so it's a double whammy against us living abroad!!

As for investing in Investment ISAs in Britain, it seems that the taxation against these can be prohibitively high as guya has stated in the past.  Cash ISAs seem to be ok as it is just cash invested, similar to bank accounts but being tax free and generally at a higher rate of interest.

I suppose the main type of investments that you won't get burnt on are individual stocks, not great for those wanting to diversify.

It looks like the rollover to Roth is just the opposite as you say, so it's a double whammy against us living abroad!!

As for investing in Investment ISAs in Britain, it seems that the taxation against these can be prohibitively high as guya has stated in the past.  Cash ISAs seem to be ok as it is just cash invested, similar to bank accounts but being tax free and generally at a higher rate of interest.

I suppose the main type of investments that you won't get burnt on are individual stocks, not great for those wanting to diversify.

I love the way the IRS includes your foreign income when a ROTH rollover is planned but excludes it if you want to
contribute to a ROTH, classic! I'm not too frustrated as I do have the DB pension, but I'll have to be in it for at least
20 years for it to be worth anything. I'm going to see if they offer a defined contruibution plan as an alternative

I'm also staying away from any investments in the UK except for a bank savings account.

Sweetpeach I'm in a scheme called USS which is the UK university scheme, that's why it hasn't been phased out
to a scheme where the company only puts in 4.5% like in my last job. The whole 401k thing is a big rip off of the
American working class......don't get me started on that. Moving to the UK is a good deal for me. I'm getting more salary, a better position, paying less into retirement and healthcare. But it looks like the cost of living will be a bit more.

There are companies that still offer DB schemes, but they are dying out and many are not offering them to new employees because it is extremely expensive for them. It just sounded a bit odd to me the way the original post was worded. I didn't know the original poster was talking about a public sector pension. Yes, they are very generous.

No I have not seen an adviser. Other priorities at the moment

Hi Sweetpeach et al,
I've been searching the Halifax website I think I'm going to open a share trading ISA rather than do the convoluted
thing of moving my GBP wages back to the US. The ISA's gains are tax free in the UK, but I think they'll be taxable
by the US. Anyway it seems like a good bet for money I plan to spend in the UK as I won't have to deal with remittance
issues. I'm avoiding investing in anything other than individual shares.