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401k or UK Pension

401k or UK Pension

Old Jun 17th 2020, 8:57 pm
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Default 401k or UK Pension

Hey guys,

I've been in the US now for 2 years and I am going through the process of a green card sponsorship with work.
I'm planning on staying in the US for a bit longer as financially it's been great and I'm still enjoying myself.
However I don't know if I'll be staying here long term.

I'm trying to determine a good strategy for my pension.
Back in the UK I contributed enough to get full company matching (5% contributed, 12% match)
In the US I've been doing the same (5% contributed, 4% match).
I've been doing this to ensure I atleast get the "free money"... funnily enough they match out to be the same overall contribution due to higher salary in the US.

The rest I've been saving up for a large downpayment for whenever I get property ($1500ish saved every 2 weeks) ... kinda hard to say if that'll be in the UK or US at this point!

Any tips on how to manage my pension contributions better? Am I shooting myself in the foot not taking advantage of contributing more earlier?
Should I try to maximise my US 401k contributions for better growth? Or maybe consider contributing to my UK pensions as well (currently not contributing anything to my UK pension)

It seems like transferring pensions is a hassle (if I want to move my 401K to the UK pension), and withdrawing etc has it's own issues too.

Any tips or things to look into would be great.

Thanks!
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Old Jun 17th 2020, 9:15 pm
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Default Re: 401k or UK Pension

You cannot contribute to a UK pension when you are tax resident outside the UK.

IMO now would be a good time to bump up your 401K contributions, assuming that your putting them into equity funds, as you should, hopefully be buying cheap assets for the long term. .... Then drop back to a lower long-term contribution rate as the market recovers, for the longer term.

Moving PP, 401K, etc. funds perior to starting to draw on them is, IMO, a fools errand - a lot of paperwork and hoops to jump through, possibly more fees, and few tangible benefits - and giving up some diversification which does have some real value too.

Last edited by Pulaski; Jun 17th 2020 at 9:18 pm.
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Old Jun 17th 2020, 9:38 pm
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Default Re: 401k or UK Pension

Originally Posted by Pulaski View Post
You cannot contribute to a UK pension when you are tax resident outside the UK.

IMO now would be a good time to bump up your 401K contributions, assuming that your putting them into equity funds, as you should, hopefully be buying cheap assets for the long term. .... Then drop back to a lower long-term contribution rate as the market recovers, for the longer term.

Moving PP, 401K, etc. funds perior to starting to draw on them is, IMO, a fools errand - a lot of paperwork and hoops to jump through, possibly more fees, and few tangible benefits - and giving up some diversification which does have some real value too.
Oh - I read somewhere that you could still contribute to a UK pension, just not take advantage of the benefits. That's really odd, I called them up and they were willing to send me direct debit information in the US to make contributions... thanks for the heads up, I'll read into it.

And my contributions are currently all going to WTIWZX IndexSelect Moderate 2055 CIT with mass mutual, apparently an expense ratio of 0.14% and slightly aggressive so I left that as is... hopefully that's good. I think I'll be changing this to some 4 fund portfolio (s&p large, s&p mid, international and bonds)

You make a very good point in increasing contributions in the short term, thanks, I'll look at doubling my contributions for now until the market gets stable.

Last edited by lylat; Jun 17th 2020 at 10:00 pm.
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Old Jun 17th 2020, 9:48 pm
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Default Re: 401k or UK Pension

If you are not doing UK NI Voluntary Contributions then you probably ought to look into it. Currently you need 35 years for a full pension, if you think you will have 35 years of UK earnings then no need to bother with it, but if you think you will fall short then they are are a very good return on investment, especially if you qualify to pay Class 2. There are a number of threads on this forum that go into the details of this.
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Old Jun 17th 2020, 9:52 pm
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Default Re: 401k or UK Pension

Originally Posted by Glasgow Girl View Post
If you are not doing UK NI Voluntary Contributions then you probably ought to look into it. Currently you need 35 years for a full pension, if you think you will have 35 years of UK earnings then no need to bother with it, but if you think you will fall short then they are are a very good return on investment, especially if you qualify to pay Class 2. There are a number of threads on this forum that go into the details of this.
Yeah, already doing the low NI voluntary contributions, low as 100gbp or something a year, great deal! Thanks
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Old Jun 17th 2020, 10:06 pm
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Default Re: 401k or UK Pension

Originally Posted by lylat View Post
Oh - I read somewhere that you could still contribute to a UK pension, just not take advantage of the benefits. .....
Well the only significant benefit is a tax deduction for your contributions against earned income, and you don't get that if you don't have any earned income taxed in the UK, and in exchange you get a restricted pool of investment funds, so in exchange for a crappy choice of investments you get .... nothing? That said, I am certain that the PP Managers of the funds I have left in the UK all say that won't (can't?) accept contributions if I am not tax resident in the UK.
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Old Jun 17th 2020, 11:38 pm
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Default Re: 401k or UK Pension

Depending upon your marginal tax bracket and the timing and amount of your downpayment you may be better off long term putting more of your downpayment into your retirement account. If you are in a high tax bracket you will be saving a lot of tax right now and gaining long term tax free growth. You could always put whatever your tax savings are into your down payment fund. Your net income would be the same but the combo of your retirement account and your downpayment account would be higher by the amount of the tax savings. With less of a downpayment you will of course pay more interest on your mortgage but that will be tax deductible at least in the US. If I recall correctly I think it is capped at a certain amount in the UK. Unless you are very unlucky over the long haul your rate of return on your investments (especially if they grow tax free) ought to beat the rate of interest you are paying on your mortgage (even without the tax relief) especially if mortgage rates remain low. So thats what I would do, save enough outside if your retirement account to ensure you have what you need to put 20% down whenever you think you might buy and funnel the rest into your retirement accounts. If you intend to go back to live in the UK (and you do not become a US citizen) you would have to research how the UK taxes US retirement accounts. Either way you are likely to be in a lower tax bracket than you are now if you are currently a reasonably high earner. No retired person that I know has ever said that they wished they saved less in their retirement accounts, but it sounds like you are well aware of that and are planning well. Good luck to you.

Also, my two cents worth on property is that you should buy as soon as you can, even if it is not your dream home and you are unsure what is ahead. Life is uncertain even when you think it is all mapped out. You can always rent out property. I have rented property in the UK while living over here using a property manager and never had any serious issues. I have also rented property over here without a property manager. Those properties are a significant part of my retirement account. Your goals are not mutually exclusive.
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Old Jun 17th 2020, 11:55 pm
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Default Re: 401k or UK Pension

Originally Posted by Glasgow Girl View Post
..... If I recall correctly I think it is capped at a certain amount in the UK. ....
You've been gone a while! Mortgage interest relief was scrapped entirely in the UK in 2000, by which time it wasn't worth much anyway as it had been capped at interest on £30k since 1988, and reduced to relief only only base rate tax, then reduced to 15% tax relief, and I think eventually down to 10%. And in any case by 2000, £30k wouldn't have bought you a dog house in London.
....Also, my two cents worth on property is that you should buy as soon as you can, even if it is not your dream home and you are unsure what is ahead. Life is uncertain even when you think it is all mapped out. You can always rent out property. I have rented property in the UK while living over here using a property manager and never had any serious issues. I have also rented property over here without a property manager. Those properties are a significant part of my retirement account. Your goals are not mutually exclusive.
That's old school advice from the UK, but I'm not even sure if it is still true there, anyway, but homes in the US generally don't appreciate as much as in the UK, and there is a much larger pool of rental homes in the US, and nicer ones than many in the UK IMO. Also the round-trip cost of buying and selling a home in the US is massively higher than in the UK, such that I would recommend against buying a home unless there is a reasonably high probability that you will live there for at least three years, and maybe five, otherwise you could easily lose more money on the by & sell than you save by buying rather than renting.

Renting out a home is a whole other matter, a good choice for some, but not for others, and isn't something that should be treated flipantly. There are significant costs and risks to renting out a home, as well as practical issues to managing a rental, and it is certainly not an easy decision, or a guaranteed money maker.

Last edited by Pulaski; Jun 17th 2020 at 11:58 pm.
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Old Jun 18th 2020, 12:01 am
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Default Re: 401k or UK Pension

Have to agree to disagree on renting out property. It has been and continues to be a fantastic investment for me. You have to buy the right property, select your tenants carefully and look after them. 3 bedroom/2 bathroom houses in a very nice area have worked out very well for me.
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Old Jun 18th 2020, 12:45 am
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Default Re: 401k or UK Pension

Originally Posted by Pulaski View Post
IMO now would be a good time to bump up your 401K contributions, assuming that your putting them into equity funds, as you should, hopefully be buying cheap assets for the long term. .... Then drop back to a lower long-term contribution rate as the market recovers, for the longer term.
​​​​​​

Originally Posted by Glasgow Girl View Post
Depending upon your marginal tax bracket and the timing and amount of your downpayment you may be better off long term putting more of your downpayment into your retirement account. If you are in a high tax bracket you will be saving a lot of tax right now and gaining long term tax free growth. You could always put whatever your tax savings are into your down payment fund. Your net income would be the same but the combo of your retirement account and your downpayment account would be higher by the amount of the tax savings. With less of a downpayment you will of course pay more interest on your mortgage but that will be tax deductible at least in the US. If I recall correctly I think it is capped at a certain amount in the UK. Unless you are very unlucky over the long haul your rate of return on your investments (especially if they grow tax free) ought to beat the rate of interest you are paying on your mortgage (even without the tax relief) especially if mortgage rates remain low. So thats what I would do, save enough outside if your retirement account to ensure you have what you need to put 20% down whenever you think you might buy and funnel the rest into your retirement accounts. If you intend to go back to live in the UK (and you do not become a US citizen) you would have to research how the UK taxes US retirement accounts. Either way you are likely to be in a lower tax bracket than you are now if you are currently a reasonably high earner. No retired person that I know has ever said that they wished they saved less in their retirement accounts, but it sounds like you are well aware of that and are planning well. Good luck to you..
Spot on, because of your inputs on 401k, I went back and did some more checking around, I've increased my 401k contribution to 10% for now (rather than 5% to match). I'm still not near the maximum contribution (I think I'm about 60% of the max allowed) for the year but I think I would be more comfortable having more funds readily available.

I've also changed the conservative fund it was going into (by default) to:
  • 10% - Vanguard Intermediate-Term Bond Index Fund
  • 5% - MM S&P Mid Cap Index Fund
  • 65% - MM S&P 500 Index Fund
  • 17% - MM MSCI EAFE International Index Fund
  • 3% - American Funds New World Fund
I picked these funds to have a 10%/70%/20%, Int/US/Bonds portfolio with lowest expense ratios, I felt a bit limited by my choice, but that might just be my lack of understanding of the funds available etc.
Once I'm comfortable with my downpayment for property I'll switch to max'ing out my 401k for sure.
Outside of this I also contribute most of the savings into Vanguard index funds (US/Total/Bonds).

I'll definitely be looking at property soon, just want to make sure I know what I'm doing as regards to residency, should probably wait for a green card first

Really appreciate you guys taking the time to respond Thanks!

Last edited by lylat; Jun 18th 2020 at 12:48 am.
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Old Jun 19th 2020, 10:39 am
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Default Re: 401k or UK Pension

Good advice above. When I was in a similar position I contributed as much as I could to my 401k and it performed very well over the years. You can probably look up your company 401k on Brightscope to get an independent assessment of how well the fees compare to other companies in your industry.
https://www.brightscope.com/ratings/

Before returning to the UK I checked out which brokerage firms support overseas customers and immediately after leaving my company rolled my 401k into a Rollover IRA. This is entirely free from costs or taxes. I chose Vanguard who have very low fees but there are other options.

There are no UK tax or reporting implications while holding an IRA in the USA except when it is time to make withdrawals which are subject to UK taxes. However, lump sum conversions of an IRA to a Roth IRA are taxable only in the USA. After retiring, with much lower income, I started converting my Rollover IRA to a Roth, and even after moving back to the UK continued to do so. Consequently by age 65 all my IRA money is now in a Roth, tax free in both countries.
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Old Jun 19th 2020, 10:52 am
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Default Re: 401k or UK Pension

Not so sure I'd be happy having 20% in world markets, but that's a personal preference. I believe in the US economy.
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Old Jun 19th 2020, 11:47 am
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Default Re: 401k or UK Pension

Originally Posted by civilservant View Post
Not so sure I'd be happy having 20% in world markets, but that's a personal preference. I believe in the US economy.
I think that's about what I've got. It's a hedge against the risk of US stagnation and recognition that others countries have had stronger economic growth over the past 40 years, albeit not continuously. I have considered changing it occasionally but +/- 5% won't make a huge difference in my portfolio's growth.

FWIW I stay away from bonds, they don't grow much, and have the potential to collapse since the only way interest rates can move from here is up .... though as of spring 2020, that clearly isn't happening any time soon, and I doubt I will live long enough to see the return of the interest rates that prevailed in the 1980's.
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