Author Topic: Help me understand British tax-advantaged retirement accounts  (Read 3549 times)

grantmeaname

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In a week or so I'm setting off from the US to try the expat thing in the UK for a while. I understand the US tax-advantaged accounts forward and backwards, and I've done a bit of research on the HMRC website and blogs like Monevator to get a basic understanding of their UK equivalents. Here is my understanding:

There are two major types of tax-advantaged accounts: private pensions and ISAs.

Private pension contributions go in tax-free (so they come out of your paycheck before tax is assessed, and 1 contributed to your pension really costs you 70p or so). My pension, and I gather most others now, are defined contribution pensions - I pick what funds get invested in and I get to keep whatever my contribution grows into. When I hit retirement age I can use the money in the account, though it isn't tax free. At retirement you also get a choice to take some of the value out of the account as a lump sum tax free. But there are no provisions that let you start drawing on your private pensions if you want to retire at 35 or so.

There are two kinds of ISAs, cash ISAs and stocks and shares ISAs. They're not really treated differently by the tax code (anymore), just what you hold in them. You put after-tax money in and don't get a tax benefit for doing so. But then your money grows tax-free and when you take it out you don't owe taxes on it. You're totally unrestricted on when you do so.

Private pensions mirror Traditional 401(k) accounts for the most part and ISAs generally mirror Roth IRAs. But because there are no mechanisms to get money out of a pension account, if you want to ER you need at least enough money to get you to normal retirement age set aside in an ISA.

Do I have this correct?

frugledoc

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #1 on: July 30, 2015, 04:19:49 PM »
Correct! Well done you already know more about UK saving options than 95% of the population.

You can pay 15 k a year into your ISA and 40k a year into your pension.

UK governments are constantly changing the pension rules which makes it hard to plan so I would fill your ISA first then pension second (unless you have an employer contribution)

Other tax advantages are NSI premium bonds, which pay around 1.35% tax free in prizes and from April 2016 you can earn 1k interest on cash holdings tax free.

Also, from April 2016 everybody can take 5k dividends tax free outside if tax advantaged accounts.

grantmeaname

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #2 on: July 30, 2015, 06:18:19 PM »
Okay! I get a 1.5x match up to 8% for the pension, so at least now while I'm in a low tax bracket I'll contribute just the 8% and focus on filling the ISA beyond that point.

daverobev

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #3 on: July 30, 2015, 08:32:24 PM »
You put 100 in to your SIPP, and the tax that would have been deducted on that income gets put in automagically as well. Either 20% or 40% depending on whether you are a higher rate tax payer or not. At least, that's how I think, or remember, it working.

You can also, potentially, do 'salary sacrifice' if that's still going (IIRC you get the national insurance part kicked in by your employer as well).

Are you a US Citizen? If so, I know the Canadian TFSA is basically off limits - it may be that the IRS doesn't see the tax shelter of the ISA, mumble mumble foreign trust taxed by US side nastily. If so just do the pension and non registered stuff... 10k before you're going to pay any tax at all, plus lots of divi income, plus a cap gains allowance makes the UK pretty awesome even without the ISA.

If only I could convince the wife that the Great British climate is nicer than Ontario's...

Cathy

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #4 on: July 30, 2015, 11:50:27 PM »
...Are you a US Citizen? If so, I know the Canadian TFSA is basically off limits...

Neither the IRS nor any court has ever expressed any view on the status of the TFSA under US tax law. According to the popular news media, income earned inside a TFSA is taxable for US tax purposes, and this assertion has been parroted all over the internet without any actual analysis. However, the law is much less clear than the popular news media would have you believe.

The only scholarly work on this topic asserts that under US law a TFSA is treated "in the same way as a Roth IRA". See Nightingale and Turchen (August 2013). However, the analysis in that article is flawed because the legal argument given by the authors is really only an argument that the TFSA successfully defers income for US tax purposes. The authors present no argument that the TFSA avoids tax on distributions, although they do assert as much in a conclusory fashion. However, there is an argument that would allow the distributions to be tax-free when made to a resident of the United States, namely that the distributions are an "amount of ... [a] pension that would be excluded from taxable income in [Canada]" pursuant to Article XVIII, 1 of the US-Canada Income Tax Convention. Note that this latter exclusion appears to have no application to a US citizen resident outside the US, making it a relatively uncommon case where US citizens need to concern themselves with tax residency.

No view is expressed herein on the merits of any of the arguments or propositions above. To be clear, I am posting the above arguments in case anybody finds them interesting, but my posting of them does not imply that I agree with them or that they are correct.
« Last Edit: July 31, 2015, 12:01:17 AM by Cathy »

Doubleh

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #5 on: July 31, 2015, 12:48:42 AM »
Grant, I've looked a little into these issues as my wife and I live in London and she is a US citizen. Definitely worth taking your pension up to the point that your employer matches; as you say there's no way to get to it before normal retirement age but it's free money and will have plenty of chance to compound. Whether you can use salary sacrifice depends entirely on if your employer offers it but if they do it helps save a little more on tax.

The bad news is on the isa, of course do your own research on this but our experience has been that they are not a good idea for several reasons:

1. The IRS doesn't recognise them as tax advantaged so your us taxes will treat it as a regular taxable account

2. Thanks to FATCA most reasonably priced providers simply won't offer accounts to US persons. The providers who will touch you mostly will charge relatively high fees

3. Any non-us mutual funds, even index funds, will likely be treated by Uncle Sam as a foreign trust or PFIC with resulting nasty compliance and tax implications and possible penalties. There is some dissent that you may be able to avoid this but it seems pretty unclear.

Overall given the choice you're probably far better not bothering with the ISA. Instead keep paying into your IRA (assuming you still have earned income if you take the foreign earned income exclusion) or into a taxable account. To be safe probably best to keep your taxable account in Usa.

The UK should respect the tax shelter of your IRA and 401k, and if you're only here for a couple of years you shouldn't need to worry too much about UK taxes on your U.S. Taxable savings. I won't go too far into details here but can give some more details of our experience if you want.

Lastly be prepared for both your UK and us taxes to get pretty complicated. Have a look at http://www.greenbacktaxservices.com, we used them to help with my wife's taxes last year and they were great and much better value than the cpa we used previously. They have some pretty good overviews on expat tax that you can download for free.

grantmeaname

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #6 on: July 31, 2015, 09:05:37 AM »
You put 100 in to your SIPP, and the tax that would have been deducted on that income gets put in automagically as well. Either 20% or 40% depending on whether you are a higher rate tax payer or not. At least, that's how I think, or remember, it working.

You can also, potentially, do 'salary sacrifice' if that's still going (IIRC you get the national insurance part kicked in by your employer as well).
Yeah, that's still a thing. My pension is on a salary sacrifice basis so the NI contributions don't come out of it either.[/quote]

...
I would loooooove to hear any opinions or musings you have about the US-UK tax treaty. I'm an accountant, not a lawyer, and not even an experienced one at that. I know big words, so I can parse what the treaty is literally saying, but there's a big difference between that and knowing what it all really means.

grantmeaname

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #7 on: July 31, 2015, 09:12:54 AM »
Doubleh, you're a gem. Thanks for all your thoughts.
Grant, I've looked a little into these issues as my wife and I live in London and she is a US citizen... I won't go too far into details here but can give some more details of our experience if you want.
Of course the great advantage of being a US citizen is that no matter where you go the IRS will follow you. I was trying to get a basis of the British tax consequences of everything first before I plunged into the US consequences, but I'm all ears about whatever you've figured out already. (My wife just naturalized as a US citizen earlier this year. I guess I'm a glutton for punishment.)
 
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The bad news is on the isa, of course do your own research on this but our experience has been that they are not a good idea for several reasons:

1. The IRS doesn't recognise them as tax advantaged so your us taxes will treat it as a regular taxable account
Interesting - could you point me to any resources to that effect that you're aware of?

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2. Thanks to FATCA most reasonably priced providers simply won't offer accounts to US persons. The providers who will touch you mostly will charge relatively high fees
Yeah, I'd heard of this. Thanks for the warning. From my time digging around in FATCA it seems like the reporting requirements aren't that onerous. I'm hoping someday one of the low-cost providers will realize as much and start providing accounts to Americans as a market differentiator, but I'm not holding my breath.

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3. Any non-us mutual funds, even index funds, will likely be treated by Uncle Sam as a foreign trust or PFIC with resulting nasty compliance and tax implications and possible penalties. There is some dissent that you may be able to avoid this but it seems pretty unclear.
This I'm also worried about. Now, do I have to be concerned about the mutual funds I hold within my employer pension? What does your wife do?

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Overall given the choice you're probably far better not bothering with the ISA. Instead keep paying into your IRA (assuming you still have earned income if you take the foreign earned income exclusion) or into a taxable account. To be safe probably best to keep your taxable account in Usa.

The UK should respect the tax shelter of your IRA and 401k, and if you're only here for a couple of years you shouldn't need to worry too much about UK taxes on your U.S. Taxable savings.
That's smart! I wouldn't have thought of just continuing to save taxable money in the US through Vanguard. It'll be at least two years before I make enough money that I can contribute to an IRA, but I could definitely keep my taxable money in the US. The expense ratios are much lower stateside too, though taxes are a much greater consideration than management fees. Problem is, I have no idea how long I'll be in the UK for or where I want to retire in the end. Are you and your wife there permanently?


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Lastly be prepared for both your UK and us taxes to get pretty complicated. Have a look at http://www.greenbacktaxservices.com, we used them to help with my wife's taxes last year and they were great and much better value than the cpa we used previously. They have some pretty good overviews on expat tax that you can download for free.
I'm actually moving over to do US tax accounting work, hilariously enough. I'll definitely look through their overviews. Here's a cookie for all your help.

KCM5

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #8 on: July 31, 2015, 09:39:49 AM »
This thread is great! I had no idea that the UK had such high limits for retirement savings. The limits of 15k/40k - I take it those are per person rather than per married couple, right?

We're eventually going to move over there and one thing I'm a little concerned about is the actual act of drawing down some of our retirement accounts from the UK. From what I've read of the treaty, it looks like *in general* (someone, please please correct me if I'm wrong!) money earned/saved in the US is subject to US tax and money earned/saved in the UK subject to UK tax (under the foreign earned income exclusion and apparently excluding earnings on ISAs). So if we were to draw down from any of our accounts while in the UK (457, Roth and Traditional IRAs, traditional pension) that money would be subject to US tax as it is now.

When you are talking about saving in a normal investment account in the US while earning UK income (in lieu of an IRA because you're under the FEIE), are there any things one has to consider when moving the money?

grantmeaname

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #9 on: July 31, 2015, 10:05:40 AM »
This thread is great! I had no idea that the UK had such high limits for retirement savings. The limits of 15k/40k - I take it those are per person rather than per married couple, right?
Yep!

Quote
We're eventually going to move over there and one thing I'm a little concerned about is the actual act of drawing down some of our retirement accounts from the UK. From what I've read of the treaty, it looks like *in general* (someone, please please correct me if I'm wrong!) money earned/saved in the US is subject to US tax and money earned/saved in the UK subject to UK tax (under the foreign earned income exclusion and apparently excluding earnings on ISAs). So if we were to draw down from any of our accounts while in the UK (457, Roth and Traditional IRAs, traditional pension) that money would be subject to US tax as it is now.
Well, the default is that all income anywhere in the world is taxable in the US unless otherwise excluded. The foreign earned income exclusion and housing exclusion are sort of stopgap measures that make the tax system a little territorial-er and a little less worldwide. The treaty has a lot of single provisons that say things like the US can't tax retirement plan distributions in the UK, but I haven't yet put it all together to make a general rule as strong as the one you stated.

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When you are talking about saving in a normal investment account in the US while earning UK income (in lieu of an IRA because you're under the FEIE), are there any things one has to consider when moving the money?
You mean like UK FATCA? I'm not sure, I haven't looked into it that thoroughly yet. But it seems like the UK should be okay with it since anything you send from the UK to the US is post-tax money that HMRC has already taken a cut of.

frugledoc

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #10 on: July 31, 2015, 12:32:23 PM »
You put 100 in to your SIPP, and the tax that would have been deducted on that income gets put in automagically as well. Either 20% or 40% depending on whether you are a higher rate tax payer or not. At least, that's how I think, or remember, it working.

The 20% gets added to your pension but if you are higher rate you claim this back on your tax return seperately.

Apparently a lot of higher rate tax payers negelect to do this and kindly give their money to the government instead.

Doubleh

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #11 on: August 05, 2015, 03:44:02 PM »
Thanks for the cookie Grant, glad to be able to help - and sorry for not coming back sooner. The link here from a tax attorney is interesting. The main discussion about whether the isa itself is a trust is a bit of a diversion, but in getting to the answer it addresses  many of your questions with some good information on us taxation of an isa and also touches on employer pensions.

http://hodgen.com/is-an-isa-a-foreign-trust/

Essentially pensions provided by an employer are protected by the uk us tax treaty so don't need to report holdings as PFICs and aren't taxed. Personal pensions without an employer contribution are more of a grey area.

As to the IRA there is an alternative approach whereby you could forego the foreign income exclusion and instead use foreign tax credits to wipe out your us tax liability, that would leave you with a taxable income so you can still invest in an ira. There are pros and cons but the greenback guide gives a good overview on this.

In terms of what we do, currently my wife holds all of her investment in the USA (apart from employer pensions) and I hold mine in the uk, mostly within an isa. We may move to the US at some point in the future which would complicate things as I would then be subject to us tax and be closer to your situation. At that point I will probably need to take professional advice, but based on what I know now I will most likely either move all of my uk investments into a single fund like vanguard lifestrategy to ensure only one set of fund reporting, or buy single stocks to avoid the pfic rules entirely.

I was going to add some thoughts to KCM5'S questions but don't have time now, I'll come back and post these later

2lazy2retire

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #12 on: August 06, 2015, 01:11:39 PM »
Thanks for the cookie Grant, glad to be able to help - and sorry for not coming back sooner. The link here from a tax attorney is interesting. The main discussion about whether the isa itself is a trust is a bit of a diversion, but in getting to the answer it addresses  many of your questions with some good information on us taxation of an isa and also touches on employer pensions.

http://hodgen.com/is-an-isa-a-foreign-trust/

Essentially pensions provided by an employer are protected by the uk us tax treaty so don't need to report holdings as PFICs and aren't taxed. Personal pensions without an employer contribution are more of a grey area.

As to the IRA there is an alternative approach whereby you could forego the foreign income exclusion and instead use foreign tax credits to wipe out your us tax liability, that would leave you with a taxable income so you can still invest in an ira. There are pros and cons but the greenback guide gives a good overview on this.

In terms of what we do, currently my wife holds all of her investment in the USA (apart from employer pensions) and I hold mine in the uk, mostly within an isa. We may move to the US at some point in the future which would complicate things as I would then be subject to us tax and be closer to your situation. At that point I will probably need to take professional advice, but based on what I know now I will most likely either move all of my uk investments into a single fund like vanguard lifestrategy to ensure only one set of fund reporting, or buy single stocks to avoid the pfic rules entirely.

I was going to add some thoughts to KCM5'S questions but don't have time now, I'll come back and post these later

Keep in mind that if you are only planning on remaining in the US for a "short" time the PFIC may not be a bad option if you leave before been permanently resident for 8 years ( assuming it may take 3 to 4 years to process your green card this could mean a total of 11 years or so) . You will still need to file the FBAR and report your PFIC fund each year but not pay the tax. Of course this would involve surrendering your GC at time of exit.

Doubleh

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Re: Help me understand British tax-advantaged retirement accounts
« Reply #13 on: August 06, 2015, 03:49:46 PM »

Keep in mind that if you are only planning on remaining in the US for a "short" time the PFIC may not be a bad option if you leave before been permanently resident for 8 years ( assuming it may take 3 to 4 years to process your green card this could mean a total of 11 years or so) . You will still need to file the FBAR and report your PFIC fund each year but not pay the tax. Of course this would involve surrendering your GC at time of exit.

Awesome, thanks - I wasn't aware that was an option! Definitely one to look into more when the time comes