Any watch outs? US Expat to UK

[koch711]

My wife and I (both 40) are relocating from the US to UK (London) this August for the 2nd time. The last time was 2014 - 2018. The first time we didn't have much invested and weren't saving much, but this time around it's likely to be long-term and we have more to consider. The relocation is absolutely not to our financial benefit, but after being back in the US for the last 5 years, we are both finding we were much happier in the UK and long-term we fell like we are still going to be in a perfectly fine situation. If there are any watch outs to consider or other advice, especially from a tax perspective, I would greatly appreciate it.

UK Salaries
Him - £100K
Her - £200K
*Note that current investments are low relative to salaries as my wife's compensation increased significantly within the last few years. Currently saving approximately 25-35% of gross but expect that to drop to 20-25% after relocation.

Current Finances
Total - $1.1M
Cash/CDs - $135K
His Rollover IRA (Fidelity) - $320K
His 401K (Fidelity) - $8K
Her 401K (Vanguard) - $270K
Taxable (Fidelity) - $372K - All VIT (HMRC reporting). Will change address to parent's address in U.S.
Asset Allocation (~12% cash, 80% stock, 8% bond) - Close enough to desired

Short-Term Financial Goals
Save up enough to buy a property in ~2 years (20% down payment, £700-850K property). Wanting to buy primarily because it's very hard to find a flat that we like in London. I don't consider property as an investment, but with investment options limited while abroad, it may be a decent place to sock money.

Long-Term Financial Goals
Go to part-time or less stressful jobs within 7-10 years, fully retire in 12-15 years. Hard to pinpoint how much we'll need as still unclear on whether we retire in the UK (would be in a more low cost area than London), another European country (e.g., France), or back in the US.

UK Investment Plans
For 2 years put most savings into online savings account to save for the house down payment. Also contribute ~3-6% into employer pension plan. Hesitant to put too much into it as still learning how easy it will be to withdrawal from it when the time comes. At the same time, also seeing how much it could save on taxes be putting more into it. After we save the house down payment or we have any salary increases, we would probably do a combination of increasing pension contributions and put some in US taxable account. Pension would be more tax advantaged, but may need to access money earlier than pension allows if retiring before the UK allows.

[Wannaretireearly]

How are you going to manage paying/filing US taxes?

I think you have a good plan. I want to spend more time in the UK, except without a job

Overall I’d say it’s easier/cheaper to retire in the UK than HCOL US. Love the NHS!

[tubaleiter]

No red flags in what you've posted - there are some big traps, but don't see you wandering into any of them. We have recently put together a wiki article specifically for US citizens in the UK: https://www.bogleheads.org/wiki/Investi ... _residents (not clear from your post if you're US citizens or not - if not, all gets a lot easier, although you'll still have some US entanglements with your existing investments. I'm assuming you are, though).

Couple of more minor points:

1. With the amount of cash you have, expect that your interest will exceed the personal savings allowance (and your wife doesn't get one at all due to her income). So that gets taxed at income rates (40% or 60% for you, 45% for her). Therefore, it may be advantageous to move as much of this as possible to tax-sheltered cash - cash ISA and/or Premium Bonds. Will still be US taxable, but at lower US rates.

2. For simplicity you may want to roll the 401ks into IRAs - or not, it's up to you. Depends how many different US accounts you want to try to maintain.

3. Withdrawing from a UK pension after pension age (55/57/58ish, depending on your age and if the government changes the rules) is not much more difficult for people with US entanglements than for UK-only. They're well protected by the treaty. Only US downside is that the 25% tax-free part is probably not respected by the US - but the UK tax on 75% of a withdrawal is probably about the same as US tax on 100%, so FTC makes it a wash anyway. You probably would not want to take the 25% tax-free up front though, because that would be UK untaxed and thus US fully taxed. Given your incomes, pension contributions make a lot of sense - especially for you, keeping you out of that lovely 62% marginal rate where the personal allowance phases out. At the very least, max out the employer match, that's free money. Note that early withdrawals are not a thing unless you die/become terminally ill. No option to just pay tax & penalty like a 401k, the money is really locked away.

4. Other tax-advantaged options are described in the Wiki, but obvious one would be a Roth IRA (backdoor Roth, given your income) - easy to do. Marginally easier to open before leaving the US, but you can do it from the UK - Interative Brokers will happily open an IRA with a UK address.

5. Next best option is an ISA, and there's where the complexity really starts...

[koch711]

How are you going to manage paying/filing US taxes?

I think you have a good plan. I want to spend more time in the UK, except without a job

Overall I’d say it’s easier/cheaper to retire in the UK than HCOL US. Love the NHS!

We will be working for UK employers, so will be paying taxes directly to UK HMRC, but will also be filing US taxes. Hoping that we are able to avoid any double-taxation as we did during our last stint in the UK. Costs are definitely lower in the UK than US, but salaries are much lower. Didn't have to use the NHS at all the last time we lived there, but more likely moving forward. Hopefully they can get it better funded and I don't run into the long wait time horror stories.

[koch711]

No red flags in what you've posted - there are some big traps, but don't see you wandering into any of them. We have recently put together a wiki article specifically for US citizens in the UK: https://www.bogleheads.org/wiki/Investi ... _residents (not clear from your post if you're US citizens or not - if not, all gets a lot easier, although you'll still have some US entanglements with your existing investments. I'm assuming you are, though).

Couple of more minor points:

1. With the amount of cash you have, expect that your interest will exceed the personal savings allowance (and your wife doesn't get one at all due to her income). So that gets taxed at income rates (40% or 60% for you, 45% for her). Therefore, it may be advantageous to move as much of this as possible to tax-sheltered cash - cash ISA and/or Premium Bonds. Will still be US taxable, but at lower US rates.

2. For simplicity you may want to roll the 401ks into IRAs - or not, it's up to you. Depends how many different US accounts you want to try to maintain.

3. Withdrawing from a UK pension after pension age (55/57/58ish, depending on your age and if the government changes the rules) is not much more difficult for people with US entanglements than for UK-only. They're well protected by the treaty. Only US downside is that the 25% tax-free part is probably not respected by the US - but the UK tax on 75% of a withdrawal is probably about the same as US tax on 100%, so FTC makes it a wash anyway. You probably would not want to take the 25% tax-free up front though, because that would be UK untaxed and thus US fully taxed. Given your incomes, pension contributions make a lot of sense - especially for you, keeping you out of that lovely 62% marginal rate where the personal allowance phases out. At the very least, max out the employer match, that's free money. Note that early withdrawals are not a thing unless you die/become terminally ill. No option to just pay tax & penalty like a 401k, the money is really locked away.

4. Other tax-advantaged options are described in the Wiki, but obvious one would be a Roth IRA (backdoor Roth, given your income) - easy to do. Marginally easier to open before leaving the US, but you can do it from the UK - Interactive Brokers will happily open an IRA with a UK address.

5. Next best option is an ISA, and there's where the complexity really starts...

Thanks for the detailed reply, greatly appreciated. We are both U.S. citizens, will edit original post. Some replies:

1. Thank you for flagging this, I wasn't aware of this at all. Our last stint in the UK we didn't have much savings and interest rates were much lower. Does a Cash ISA not generate the same complexities as a regular ISA? If so, will definitely be doing that.

2. I will probably roll my existing 401K from my current employer into my Rollover IRA as soon as I hit my last work day in the US. Will see if I can get my wife to do the same thing, but she's not as apt to deal with that unless super compelling. The money is in low ER funds, so probably not a big deal.

3. Thinking more and more that we need to really maximize pension contributions to the extent we are also meeting our house down payment goal. Had planned to continue funding our US taxable acct, but don't think we will do that for quite a while and focus on UK pensions and a home. Due to me probably having some salary in that 100-125K band, will probably just have my wife contribute enough for employer matching and then everything else we can contribute put into mine.

4. For Backdoor Roth IRA, if I already have a Rollover IRA, I was under the assumption it would be a pain for me to do. For my wife, would you recommend that over maximizing UK pension contribution? Or hard to say w/o knowing expected retirement date and knowing how much we want invested in US vs. UK?

5. Hoping I can avoid needing to use an ISA for a long time if not forever (or until laws/treaties change).

[tubaleiter]

No red flags in what you've posted - there are some big traps, but don't see you wandering into any of them. We have recently put together a wiki article specifically for US citizens in the UK: https://www.bogleheads.org/wiki/Investi ... _residents (not clear from your post if you're US citizens or not - if not, all gets a lot easier, although you'll still have some US entanglements with your existing investments. I'm assuming you are, though).

Couple of more minor points:

1. With the amount of cash you have, expect that your interest will exceed the personal savings allowance (and your wife doesn't get one at all due to her income). So that gets taxed at income rates (40% or 60% for you, 45% for her). Therefore, it may be advantageous to move as much of this as possible to tax-sheltered cash - cash ISA and/or Premium Bonds. Will still be US taxable, but at lower US rates.

2. For simplicity you may want to roll the 401ks into IRAs - or not, it's up to you. Depends how many different US accounts you want to try to maintain.

3. Withdrawing from a UK pension after pension age (55/57/58ish, depending on your age and if the government changes the rules) is not much more difficult for people with US entanglements than for UK-only. They're well protected by the treaty. Only US downside is that the 25% tax-free part is probably not respected by the US - but the UK tax on 75% of a withdrawal is probably about the same as US tax on 100%, so FTC makes it a wash anyway. You probably would not want to take the 25% tax-free up front though, because that would be UK untaxed and thus US fully taxed. Given your incomes, pension contributions make a lot of sense - especially for you, keeping you out of that lovely 62% marginal rate where the personal allowance phases out. At the very least, max out the employer match, that's free money. Note that early withdrawals are not a thing unless you die/become terminally ill. No option to just pay tax & penalty like a 401k, the money is really locked away.

4. Other tax-advantaged options are described in the Wiki, but obvious one would be a Roth IRA (backdoor Roth, given your income) - easy to do. Marginally easier to open before leaving the US, but you can do it from the UK - Interactive Brokers will happily open an IRA with a UK address.

5. Next best option is an ISA, and there's where the complexity really starts...

Thanks for the detailed reply, greatly appreciated. We are both U.S. citizens, will edit original post. Some replies:

1. Thank you for flagging this, I wasn't aware of this at all. Our last stint in the UK we didn't have much savings and interest rates were much lower. Does a Cash ISA not generate the same complexities as a regular ISA? If so, will definitely be doing that.

2. I will probably roll my existing 401K from my current employer into my Rollover IRA as soon as I hit my last work day in the US. Will see if I can get my wife to do the same thing, but she's not as apt to deal with that unless super compelling. The money is in low ER funds, so probably not a big deal.

3. Thinking more and more that we need to really maximise pension contributions to the extent we are also meeting our house down payment goal. Had planned to continue funding our US taxable acct, but don't think we will do that for quite a while and focus on UK pensions and a home. Due to me probably having some salary in that 100-125K band, will probably just have my wife contribute enough for employer matching and then everything else we can contribute put into mine.

4. For Backdoor Roth IRA, if I already have a Rollover IRA, I was under the assumption it would be a pain for me to do. For my wife, would you recommend that over maximising UK pension contribution? Or hard to say w/o knowing expected retirement date and knowing how much we want invested in US vs. UK?

5. Hoping I can avoid needing to use an ISA for a long time if not forever (or until laws/treaties change).

1. To the US, a cash ISA is just a taxable bank account. No weird foreign reporting (beyond FBAR and 8938, if you have high enough balances, but those are both easy to do yourself, nothing like the horror of PFIC).

2. 401k plan makes sense - both 401k and IRA are fine, it's more the hassle of dealing with multiple US accounts/brokerages. Lots of unpredictability in how they handle "foreign" customers.

3. Pension plan also makes sense. Since the UK taxes individual, not couples (unlike the US) there are definitely opportunities to take advantage of one spouse's situation to improve the overall family situation.

4. You're right, with a rollover traditional IRA it does make backdoor Roth more complicated/less advantageous, I forgot that annoying caveat.

For your wife, choosing between Roth IRA and UK pension is really dependent on your goals. But broadly, I think the same order of precedence that typically applies to US-only investors applies, just substituting UK pension for 401k:

1. Pension up to the max employer match - free money
2. Roth IRA up to the max
3. Pension from there up

Only caveat would be if you expect to be in a much lower tax bracket at retirement. Since your wife is currently at 47% (45% income plus 2% NI), if you're expecting to be in the 20% bracket in retirement, then it may make sense to save the 47% now using pension instead of paying that 47% and saving 20% in the future in the Roth. But future tax brackets are tough to predict!

The other advantage of the Roth is that you can withdraw contributions at any time, e.g. for a house down payment (not gains, without paying taxes and penalties). You can't do anything with a pension.

5. ISA is definitely a borderline case. It's annoying because it's an absolutely brilliant account for UK-only taxpayers (Roth IRA on steroids - much higher limit and you can withdraw contributions and gains anytime, tax free). But PFIC + MiFiD/KID makes it challenging. Once the UK eventually gets around to repealing the EU rules requiring a KID it'll be a no-brainer - just buy US ETFs inside the ISA wrapper. But until then it's basically only individual stocks, which is a faff and not that diversified.