Saving for retirement is a vital step in every person’s life, and a pension is one of the most common ways to do this in the UK.
Thanks to the investment returns and tax relief on offer, your UK pension fund can be an effective tool for reaching your financial goals in retirement.
However, for UK citizens who are living and working overseas, your UK pension and retirement planning requirements can present a few more complications than for those living at home.
If you live abroad already or intend to retire abroad when you reach retirement age, it’s important to be aware of the rules that could affect you when drawing a UK pension overseas as a non-UK resident.
In this guide to expat pensions, you can find out everything you need to know about drawing your retirement income while living abroad.
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The UK State Pension
The first thing that expats need to be aware of is their UK State Pension, which is essentially the retirement savings plan provided for them by the UK government.
This system ensures that UK residents who have worked throughout their lives have money to live on when the time comes to retire.
The bedrock of your pension plans
While it’s likely that there are other UK pension options that you’ll make use of, the State Pension can provide a great basis for your retirement plan.
Under the new State Pension, the full pension amount you can receive is £179.60 a week, adding up to more than £9,300 a year.
The State Pension is typically paid every four weeks into a bank account of your choice.
Eligibility criteria for the State Pension
To be able to claim the State Pension, you must meet certain eligibility criteria.
State Pension Age
Firstly, you may only claim the State Pension when you reach State Pension age.
As of the 2021/22 tax year, the State Pension Age stands at 66, but this is set to rise to 67 and then 68 over the coming years.
You can check what your State Pension Age will be when you retire using the government website.
National Insurance Contributions
The next criterion that determines your eligibility is the number of qualifying years of National Insurance Contributions (NICs) that you have made.
Under the new State Pension rules, you need to have made at least 10 years of qualifying NICs in the UK throughout your working life to receive the minimum State Pension amount. To receive the full pension amount, you need to have made at least 35 qualifying years of NICs.
As the majority of people in the UK are Pay As You Earn (PAYE) workers, NICs are taken directly from your pay each month in the same way that you pay Income Tax.
If you’re not on PAYE, such as if you’re self-employed, you’ll need to make your NICs of your own accord. You can also make NICs voluntarily if you need to top up your record.
You can check your NIC record here on the government website.
Expats and the UK State Pension
When it comes to the State Pension when you live abroad or retire overseas, expats can generally expect to receive their State Pension.
However, you must contact the International Pension Centre UK when you’re approaching retirement age.
Crucially, you also need to bear in mind that the rules can vary depending on where you live.
Living in Europe
Previously, thanks to bilateral agreements, years of working and contributing to social security in European Union (EU) member states, a European Economic Area (EEA) country, or in Switzerland could count towards your qualifying years to receive your UK State Pension.
You could also potentially claim the State Pensions from other countries if you lived and worked there.
However, since the UK left the EU in January 2020, these rules have now changed.
You cannot claim the State Pension of your new country of residence, nor can you use years working in that country to count towards your eligibility for the UK’s State Pension.
Fortunately, expats who live in the EU, the EEA, or Switzerland can continue to receive their UK State Pension, providing that they meet the UK’s eligibility criteria.
Expats who lived and have stayed in the same country since Brexit will not see their State Pension amount reworked.
Living outside of Europe
The rules for countries outside Europe are now the same as for those in Europe.
You can claim your State Pension, provided that you have made sufficient NICs in the UK throughout your working life.
While living abroad, you can have your State Pension paid into a UK bank account.
Alternatively, if you’d prefer to have your pension paid into an overseas account, you will need to provide your international bank account number (IBAN) and your bank identification code (BIC).
As you’ll be paid in the local currency of your country of residence, you will be at the whims of the exchange rate from British Sterling to that currency.
As a result, the amount you receive may vary each period.
Other assorted State Pension rules
You can only claim the State Pension in one country in a single year. If you move to a different country in that year, you cannot be paid for part of the year in each country.
Bear in mind that the rules in one country may not be the same as another.
Make sure you check the rules and requirements of your country of residence as it could impact your retirement planning.
UK private pensions
Aside from your State Pension, you may have been paying into a private pension plan, and there are plenty of good reasons to do so.
Pensions are thought of as tax-efficient, as they benefit from tax relief.
This means that when you make a contribution into your private pension, the Income Tax you would have paid on this is instead added to the pot at your marginal rate of Income Tax.
This means that, if you pay basic-rate Income Tax, you’d receive 20% back on your contributions. So, in real terms, for every £80 you pay in, you would receive £100 into your pension pot.
For higher- and additional-rate taxpayers, you would receive £100 for a contribution of £60 and £55 respectively.
This tax-efficiency makes a private UK pension an attractive prospect for building a retirement fund.
As well as tax relief, your private UK pension will be invested on your behalf by a fund manager across a range of bonds and equities.
This means your money also has the chance to generate investment returns. Over long periods, this can help give your private UK pension a boost, offering you even more money for your retirement.
Under the Pension Freedoms legislation introduced in 2015, UK residents now have even more choice over how they use their retirement funds.
These rules offer greater flexibility for drawing retirement income, including allowing you to take a 25% tax-free lump sum from age 55, rising to 57 in 2028.
This tax-free lump sum could be invaluable in financing your move abroad.
For example, you could then buy an annuity with the rest of your pot, or you may prefer to simply leave it invested and flexibly draw your pension as income throughout your retirement.
Claiming your UK pension abroad
Just as with the State Pension, you can claim a private UK pension while living in another country.
Naturally, you will also face the same exchange rate issues. You may also have to pay fees to your provider to give you access to your money abroad.
It’s worth speaking to your pension provider as they may have specific requirements from you before you move, such as filling in forms or being notified that you’re moving.
UK workplace pensions
As well as having a private pension plan, you’re also likely to have been enrolled in a workplace pension if you were employed in the UK.
Employer pensions are compulsory
Under current rules, as of September 2021, UK employers must provide you with a workplace pension scheme if you meet the following criteria:
- You are over 22 years of age
- You earn at least £10,000 a year
- You work in the UK.
Workplace pension contributions
Most workplace pension schemes are now defined contribution (DC) rather than defined benefit (DB). This means the amount you receive at the end is based on how much you put in, rather than being based on your final salary.
In total, the minimum amount you must contribute to your workplace pension is 8% of your earnings.
Of that 8%, 3% must come from your employer, with the remaining 5% coming from a combination of your salary and tax relief.
For basic-rate Income Tax payers, this 5% is made up of 4% of your salary, and 1% tax relief.
Your employer may choose to offer more, and you are also free to put more of your salary into your pension pot.
Claiming your workplace pension abroad
As of September 2021, UK law allows you to draw your workplace pension holdings while living abroad. The government does not expect this to change due to Brexit.
It may be worth contacting your workplace pension provider to check that you’ll be able to draw your pension while living in a new country.
Using an offshore pension plan
If you intend to live abroad, you could consider using a scheme in another country, rather than a UK pension. Since these schemes were designed for expats, they can present a better choice for your pension saving.
The scheme must be a qualifying recognised overseas pension scheme
One thing to bear in mind is that any offshore pension fund you choose must be a Qualifying Recognised Overseas Pension Scheme (QROPS). These are pension plans and schemes available in other countries that meet HMRC criteria.
It is your responsibility to check that the scheme you are transferring into is a QROPS.
As well as transferring your private pension into a QROPS, you can also ask your employer to make their contributions directly into it.
Downsides to offshore private pensions
There are a couple of disadvantages of pension transfers to QROPS that you should bear in mind.
When you transfer to a QROPS, there may be a tax bill to pay, depending on what country the scheme is held in.
QROPS in the EEA or Gibraltar
You’ll pay 25% tax when you transfer your pot if your chosen QROPS is in the EEA or Gibraltar and you:
- Live outside the UK, Gibraltar, or the EEA
- Move outside of the UK, Gibraltar, or the EEA within five years of transferring.
QROPS outside the UK, Gibraltar, or the EEA
Unless you live in the country where the QROPs is based, you’ll pay 25% to transfer to a QROPS outside of the UK, Gibraltar, or the EEA.
Typically, you do not pay tax if you transfer to a QROPS provided directly by your employer. There is also no tax to pay if you asked for a transfer to a QROPS before 9 March 2017.
Another downside to an offshore pension plan is that it’s likely to be more concentrated in its holdings of offshore investments.
As a result, the investments it chooses may be ones that you’re not familiar with, or that you wouldn’t necessarily choose for yourself as they present more risk than you’re comfortable with.
Think carefully before moving money into an offshore scheme, as it may impact your lifestyle in retirement.
Tax rules while living abroad
A key point to remember if you live abroad is that when drawing UK pension income abroad as a non-UK resident, you may still have to pay UK Income Tax.
This is because the money you are drawing is classed as UK income.
Your marginal rate of Income Tax will depend on how much money you’ve taken from your pension pots for your retirement income.
You may also be charged Income Tax in your country of residence on top of UK Income Tax.
If this happens, you may be able to claim back tax relief from the UK if the country you live in has a double-taxation agreement with the UK government.
Make sure you check whether your country has this, as you may end up paying more Income Tax than necessary otherwise.
Your retirement goals
While it’s important to know whether you’ll be able to access your pension funds in another country, deciding whether to move for your retirement ultimately depends on your retirement goals.
If you’ve always dreamed of living in another country, then your pension may well be the best way to support yourself in this.
However, if you have other ambitions, such as to travel the world or focus on certain pastimes that you didn’t have time for in your working life, then you might want to reconsider how you use your retirement funds.
Working with a financial advisor
If you’re an expat in the process of retirement planning and you’re still unsure of what the best choices are for you, it might be worth taking professional financial advice from a qualified financial advisor like me.
A financial advisor like me can offer comprehensive financial planning services that can help you to achieve your financial goals and retirement plans.
It’s worth choosing an advisor with specific knowledge of expat pension planning so that you receive the best, most suitable pension advice for you and your circumstances. I can help with this.
Advisors can also help with other financial decisions in your life, including tax, business planning, and estate planning.
This advice could be invaluable in helping you to work out just how much you would need to achieve your financial goals.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
This article is for informational purposes only and does not constitute financial advice.
All contents are based on our understanding of HMRC legislation, which is subject to change.
Dan is an experienced Senior Financial Consultant at W1 Investment Group with over 18 years experience. He helps international and expatriate clients make tax-efficient savings and investments in Europe and worldwide.