What is an alternative to an IRA for Americans living in the UK?

An IRA is a tax-deferred account, not a tax-free account. The closest thing you’ll find to tax-free accounts are the Roth IRA in the US or the ISA in the UK. With these accounts, you pay money in post-tax, and it grows tax-free.

By contrast, an IRA or a pension is tax-deferred. Growth occurs inside the accounts, and you don’t pay tax on it. Then, when you take money out, it's taxable at income tax rates.

UK pensions are similar in structure to the IRA. There are differences – such as the fact you can contribute different amounts – but in both cases, you pay in pre-tax money from your employment for the upfront tax benefit and deferred growth. To get these benefits, you have to keep your IRA inside the US. There is no way to move it to the UK.  

If you want to grow your retirement assets, a UK pension could be an appealing option because of the size of the allowances. If you have the right level of income, you can put away quite a lot of money every year into UK pension.

For US citizens contributing into a UK pension, sometimes we recommend taxing employer contributions instead of deducting employee contributions. Typically, this is what we advise for American citizens who will eventually return to the States and retire there.

The reason we may tax employer contributions and not deduct employee contributions is because this can help build up a tax basis within the UK pension for that individual from a US tax perspective. Then, if the individual eventually returns to live in the US and starts receiving money out of their UK pension as regular pension distributions, the contribution element of the distributions will not be subject to US taxes because they've already been taxed previously on their US returns. In this scenario, the growth element of the UK pension would still be taxable in the US, but the contributions wouldn’t be. Additionally, because they're living in the US at this point, the UK should not look to tax regular UK pension distributions either. 

For non-residents of the UK living in the US, it’s also possible to receive such UK pension payments from a UK pension gross (i.e. with no UK taxes withheld), so you’re just reporting any taxable element on the US tax returns. Furthermore, in the US, you may be able to offset the taxable element with excess foreign tax credits which have accrued whilst working outside of the US and which can be carried forward for up to ten years. 

As a final point, typically the first 25% of your UK pension is tax-free in the UK. From a US standpoint, this 25% could be considered taxable in the US under the “savings clause” although there is the view – with suitable caveats and disclosures – that this should not be taxable in the US either.