At Tanager Wealth Management we believe in efficiency and optimizing tax benefits wherever possible. This is our first in a series of articles on how a household with US & UK lives can be financially efficient. There are many ways Tanager can help, and the most basic is to maximize contributions to your US & UK pensions.
The first building blocks of a US taxpayer household are the company pension (401k, 403b, 457 plans) and the Individual Retirement Arrangement (IRA). These pensions are recognized in the US-UK Double Taxation Agreement, and contributions lower your annual taxable income in both countries while saving money for your future retirement. You can contribute $5,000 for 2012 and $5,500 for 2013 (if 50 or older, the limits are $6,000 and $6,500, respectively) to IRAs, and this is a great way to grow your retirement savings tax-free that will add up over time. The good news is that you can make your 2012 contributions until April 15, 2013 if you have not already done so. Contributing early in the tax year allows your money to grow tax-free for an additional year versus contributing at the end of the year.
Employer sponsored 401ks are the second building block of your retirement plan, and have higher contribution limits. However, many Americans living in the UK will no longer be employed by a US company, and may have “orphaned accounts” at previous employers. These accounts are usually best rolled into an IRA to benefit from economies of scale and to lower the overall cost of managing retirement assets. For example, many IRAs will have very low annual expenses ($10/year, for example) and allow investment into low cost funds such as ETFs and index funds with annual expenses as low as 0.05%. Employer 401ks can have average expenses up to 1.38%, as discussed in a 2011 Investment Company Institute study, meaning that an IRA rollover could save you 1% of annual costs. In addition, transaction costs are lower when spread across a larger asset base, making those $15 trading costs become a lower percentage of overall assets on larger accounts.
The UK has many types of tax wrappers available on the market, but only a few are suitable for households with US & UK obligations. As brevity is the soul of wit, I will endeavour to focus only on Corporate Pensions and Self Invested Personal Pensions (SIPP).
Corporate Pensions are often similar to 401ks, and can be called “money purchase” or “defined contribution” and are sponsored by your employer. These will often have employer matching contributions, like 401ks in the US, and offer a selection of funds from the firm that runs the pension for your company. You should always consider how much your company matches your contribution when making your annual contributions to ensure you receive this “free money” from your employer. However, the fees and charges are often very opaque and very high, and “maxing out” your contribution may not be the most efficient thing you can do for your long-term savings.
The UK Department for Work and Pensions estimates that UK corporate pensions have average charges between 1.23% – 1.53%, but admit that this may not reflect all the opaque costs in managing, selling, and investing the plans. This huge annual cost just provides access to the pension, and does not include any costs of investment advice you may seek. This may not be the most efficient way to save for retirement, beyond capturing your employer’s matching contributions, as we will discuss.
Similar to the US pension market, it may be more efficient to consider the UK analogue to an IRA, a SIPP. This pension account is often much less expensive to administer, and allows access to ETF and index-based investments that could cost as little as 0.20%. This is another potential annual saving of more than 1% that prevents erosion of your pension account.
- Do you know what charges are in your US & UK employer pensions? Find out.
- Do you know how much you can save annually from an IRA or SIPP? Find out.
- Have you made your 2012 & 2013 US IRA contributions?
If your household has a life that straddles the US & UK, and would like help planning for your future, please contact us at firstname.lastname@example.org to learn more about how we can help.
Note: In the UK pension transfers are regulated by the Financial Services Authority, Tanager Wealth Management LLP is not authorised to advise on actual pension transfers but can introduce you to a firm who can help you with this. Tanager Wealth Management LLP is not a tax advisor, and does not provide tax advice, but can help you find a dual qualified US & UK tax advisor.
 Charging levels and structures in money purchase pension schemes, UK Department for Work and Pensions, 2010 (630)