I've heard ETFs have issues for Americans living in the UK - what should I do if I'm looking for similar long-term growth & flexibility?

Question

I am a U.S. citizen living and working in the UK and want to invest some of the income that I currently have sitting in savings. However, my U.S. based income is 0 (I take the Foreign Earned Income Exclusion on my U.S. taxes), so standard U.S. based retirement vehicles such as IRAs/Roths are out. I suppose the UK equivalent is a SIPP, but I’ve heard that these can’t be transferred to US pensions and that withdrawals are taxable in the U.S. I hope to live in the UK long term, but this will depend on the outcome of a future visa application, so right now I don’t know what the long-term future holds.
Ideally, a ‘set it and forget it’ approach such as an index fund or ETF seems attractive – I am very much in favour of anything where I can expect reasonable long-term growth, and where my investment is not completely locked up until age 67+. However, I’ve read that US-based ETFs are a bad idea for Americans living in the UK, and also that UK-based investments are a bad idea for UK-resident Americans as well. (The latter article claims that a core of U.S. registered mutual funds and ETFs have been granted UK “reporting fund” status and are ideal, though it neglects to mention what any of these ETFs are; I also wonder if that is a route for a more experienced investor than myself.)
What would be a reasonable investment strategy for someone in my situation, who wishes to invest for the long term, but would like to maintain more flexibility than a pension provides?

Grade 'Eh' Bacon · Answer

There are a few significant questions inherent what you're asking, namely:
(1) What tax-efficient vehicles may exist for a US citizen living in UK and likely staying there long term, but maybe returning to the US?

This is a very hard problem to answer. Something that could work great if you end up staying in the UK 'till retirement could be bad if your visa falls through and you move back to the US in 5 years. You need to solve that question before you make long-term choices like pension contributions.
Note that investments in US-taxable forms (ie: simply holding investments in a regular brokerage account), would also need to be reported to the IRS, and FEIE won't cover that investment income. You might be able to claim foreign tax credits on such income, but that only applies if (a) you leave the FEIE system and claim FTC's against employment income as well, and (b) you pay UK tax on those investments, meaning leaving in regular taxable form.

(2) How to keep up 'flexibility' under that system?

Flexibility in pension systems typically is limited; given the open questions I referred to above, it may be best to simply not use a special tax account until you have confidence in where you will live for at least a few years - consider waiting until you receive visa determination.

(3) What actual investments would provide a similar outlook to US-based ETF's?

There are index funds of the UK stock market that will perform a similar function; if you believe the US-based funds suit you better, you need to outline why that would be the case and then seek out products that have those characteristics.

(4) Currency considerations?

Note that if you invest in USD-based funds, you add on the foreign currency risk of how the USD performs vs the GBP. Of course if you end up retiring in the US, it is the GBP-based retirement funds that give you risk. Again, hard to recommend something without knowing more about where you will be in 5-50 years.

I've heard ETFs have issues for Americans living in the UK - what should I do if I'm looking for similar long-term growth & flexibility?

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