Government guarantees state pension increases post-Brexit
As a result of Brexit, Brits will no longer have an automatic right to work or live in the EU. However, the last minute Brexit deal has brought welcome news to UK citizens who plan to and are permitted to move to and retire in the European Economic Area (EEA) or Switzerland in the future.
Those who were already living in the EU before 31 December 2020 had been reassured that they will receive the same uprating to UK state pensions as paid to those living in the UK. This is currently based on the ‘triple lock’ formula, or the highest of earnings growth, price inflation or 2.5% each year.
But up until New Year’s Eve no deal been struck for those moving abroad and retiring in future. Experts warned that the loss of inflation protection on a full state pension could have cost overseas pensioners about £138,700 during their retirement.
However, on 31 December the government updated its guidance to confirm the same increases would apply to those moving to the EEA or Switzerland in the future.
At the same time, it was confirmed that those working in the EEA or Switzerland can also continue to count future social security contributions paid in overseas countries towards meeting ‘qualifying conditions’ for the UK state pension.
Individuals with fewer than 10 years of ‘credits’ receive no UK state pension. To receive the full UK state pension, you need 35 years of credits.
Steven Cameron, pensions director at Aegon, said: “While Brexit removes the automatic right to work or live in the EU, the last minute Brexit deal has delivered some very welcome news for anyone who does retire in another EU country.
“Under pre-Brexit arrangements, UK citizens who moved to the EEA or Switzerland and who claimed their UK state pension overseas received the same yearly increases as those still in the UK. In recent years, upratings have been in line with the ‘triple lock’, or the highest of UK earnings growth, price inflation or 2.5%.
“While those who were already living in the EEA or Switzerland before 31 December 2020 had been assured that this would continue to apply to them, it was only on New Year’s Eve that the UK government confirmed the same increases would apply to those who in future move to and retire in the EEA or Switzerland.”
Some people might have underestimated how much money was at stake. This April, the state pension will increase by 2.5% from £175.20 to £179.60 a week. While £4.40 extra a week may not look huge, losing all future increases really adds up.
According to the Money Advice Service, an inflation-linked state pension of £175.20 a week is worth about £327,000 whereas one that doesn’t increase is worth about £188,300 which is £138,700 less.
With many people living 20 or more years after state pension age, any form of inflation-proofing is highly valuable, with the triple lock particularly so.
“For those some way off state pension age living abroad, there was also welcome news that they will continue to receive ‘credits’ towards their UK state pension under ‘social security co-ordination’ Individuals need 35 years of credits to qualify for the full UK state pension while those with under 10 years receive no UK state pension,” said Cameron, “While the treatment of state pensions was clearly not top of the agenda in last minute Brexit negotiations, the outcome will make a huge difference to those planning to move abroad in future for their retirement years. Fortunately, those planning to retire to the Costas won’t find Brexit has, in state pension terms, ‘cost a’ fortune.”