What happens to your pension when you emigrate
Moving abroad is a major life decision, impacting your family, friends, work and finances.
If you’re considering emigrating specifically for your retirement, you need to be clear about what happens to your pension and entitlement when you move as well as how exchange rates and tax rules could impact the amount of money you receive.
The country you decide to move to is also crucial from a pension point of view.
Many retirees may be concerned about the impact of the Brexit vote on their pension rights. At the moment there has been no change as a result of Britain’s decision to leave the EU but this could all change once Article 50 has been triggered and negotiations start.
As things stand, British expats are entitled to receive the UK state pension no matter where they live in the world once they reach the UK’s state pension age. The amount they receive will depend on their National Insurance contribution (NIC) record.
Under the new state pension rules, you must have at least 10 years of qualifying NICs to receive any state pension. To get the maximum – £155.65 per week – you must have 35 years of qualifying NICs.
In terms of the process, if you already live abroad, you need to claim four months before your state pension age. You can do this by contacting the International Pensions Centre. If you’re in the UK, get in touch with the International Pensions Centre, HMRC, your local council and benefits office (if you’re receiving state benefits) to tell them you intend to move abroad.
Your pension can be paid into a bank in the country you’re living in or a bank or building society in the UK.
An important point to note is that if you choose to have the money paid into a foreign account, it will be paid in the local currency rather than sterling so there is exchange rate risk. You can choose to be paid every four or 13 weeks.
Depending on where you move to, you may be able to receive increases to the state pension amount under the UK government’s ‘Triple-Lock’ guarantee. This allows for the state pension to rise annually by the higher of inflation, average earnings or a minimum of 2.5%.
Paul Davies, director at bdhSterling, a provider of cross-border financial advice, says there used to be agreements between the UK and various countries (mainly ex-commonwealth) where they would uprate each other’s pensions to reflect the economy where the migrant was living but “this fell through with some countries”.
“Now, your state pension will only increase each year if you live in the European Economic Area, Switzerland, or certain countries that have a social security agreement with the UK. However emigrant favourite countries like Australia, New Zealand or Canada won’t get an uprate in UK pensions,” he says.
Kate Smith, head of pensions at Aegon, says expats may still have to pay tax on their state pension if they are classed as a UK resident for tax purposes.
“If people live in a country without a double tax agreement they have to pay tax in both countries,” she says.
Private or workplace pension
With the dawn of pension freedoms, if you’re aged 55 and over you can now access your entire pension pot. You can withdraw 25% tax free and pay income tax on the remaining 75%. This rule also extends to those moving or living abroad, though the tax you pay may vary.
When you move overseas, you still have the option of buying an annuity (guaranteed income for life) or going down the pension drawdown route (keep savings invested but spread balance over time).
Whether you choose an annuity or drawdown, you have two options when it comes to getting your income. The money can be paid into a UK bank or transferred to an overseas bank.
If you arrange for it to be paid into a UK bank, the amount will be paid in sterling and you’ll then need to convert it into a local currency, either through a local bank or currency broker. One way to minimise transfer charges is to open an international bank account offered by the same provider in the UK.
However, a currency specialist may be able to offer a fixed exchange rate for a consistent payment over the year, but Smith cautions that the Financial Service Compensation Scheme (FSCS) doesn’t cover currency brokers. “People should be careful to choose one that’s on the Financial Conduct Authority’s (FCA) authorised payment institution list rather than one that is just registered with the FCA.”
The other option is to transfer your pension overseas as part of the ‘Qualifying Recognised Overseas Pension Scheme’ (QROPS). These are designed specifically for people intending to move overseas and who wish to take their pension with them.
A potential benefit here is that income from a QROPS may be taxed more favourably depending on where you move to but in some countries, it may not be as generous as what’s offered in the UK.
For example, the 25% tax-free cash lump sum rule introduced as part of pension freedoms doesn’t apply in Germany or France, where all the pension is treated as taxed income.
Retiring abroad is a complex decision: top tips
Smith says: “Retiring overseas can be an attractive option, but people need to do it with their eyes wide open, and find out as much as they can about their chosen new country and how their retirement income may be affected.
“In theory the pension freedoms make it much easier to retire overseas. But the reality is that more people are probably thinking twice about a move overseas following the uncertainly arising from the EU referendum, including whether future state pension increases will continue to be paid.
“Affordability is a key issue for pensioners, this hasn’t been helped by the dramatic fall in the value of sterling and the uncertainty of future exchange rate volatility.”
Here are top tips to consider before taking the plunge:
- Contact the International Pensions Centre to check how your state Pension may be affected, particularly if you will be entitled to pension increases.
- Get a record of your NICs and state pension forecast
- Tell HMRC, your local council, benefits office and the International Pensions Centre you are moving abroad.
- Find out whether the country you are moving to has a double tax agreement, so you don’t pay tax in both countries.
- Find out whether you can take a tax-free lump sum for your UK pension once you move abroad and how much income or wealth tax is payable in your chosen country.
- Think about using a currency specialist to give you a fixed exchange rate for a year to avoid variations in your pension income.
- Check out bank account options and charges.
- Get specialist financial and tax advice before taking any action.