It’s important to understand how your pensions are paid and how retirement savings are affected if you retire abroad.
Retirement income can have several strands – the state pension, workplace or personal pensions, dividends on investments and interest on savings.
Expats might also earn buy to let rents or income from a job or self-employment.
Part of the decision to leave Britain for an overseas destination must include working out how much retirement income is available.
Moving abroad does not mean losing any retirement savings. The cash is safe sitting in a pension fund until you decide what to do with it.
Effectively, expats have three pension options:
Each of these options is considered below, together with details of how the state pension is paid overseas.
Pensions seem complicated, but the principle is simple. A pension is a way of deferring some of your income now by putting some money aside for spending when you are older.
To encourage retirement saving, the government offers tax incentives, like tax relief on pension contributions and no capital gains tax on fund growth.
The state pension offers a minimum income to cover the basics.
Retiring overseas adds some extra options, such as the Qualifying Recognised Overseas Pension Scheme (QROPS).
The state pension is worth £159.55 a week from April 2017. Anyone who qualifies for the state pension can claim their money wherever they live.
The maximum yearly state pension is £8,296.60, which is doubled for a couple.
The money can be paid into a British bank or a foreign account in the local currency, which avoids bank charges and transfer fees.
In Europe and some other countries, the state pension increases each year under the ‘triple lock’, which guarantees a rise of 2.5% or annual gains in inflation or average wages, whichever is highest
For expats moving outside Europe, the state pension is frozen at the amount first paid in most countries.
The winter fuel payment is only paid to pensioners in a European Economic Area country or Switzerland who have a ‘genuine link’ with the UK.
Click here for a list of countries where the state pension is index-linked
Yes, providing they have enough qualifying years of social security contributions in each country.
For instance, an expat with 20 qualifying years of national insurance contributions in the UK would get 20/35 of the weekly amount.
That works out as 159.55/35 x 20 = £91.17 a week.
If they then built 20 years of social security payments elsewhere, they could receive a pro rata state pension in that country as well.
New Zealand is an exception, as the state pension there is reduced by the amount of overseas money received.
Personal pensions cover a range of products, such as private pensions, self-invested personal pensions (SIPPs), and workplace schemes.
These are technically ‘direct contribution’ pensions with their value based on how much the underlying retirement pot is worth. This can vary from day to day depending on how the underlying investments perform.
Index-linking is not generally an option for direct contribution pensions
Most personal pensions only pay into a UK onshore bank account and retirement savers may have to juggle currency rates to time transferring their Pounds into local currency.
Specialist currency brokers will offer a fixed exchange rate and discounted fees for a year-long contract.
Beware that these brokers are not covered by the Financial Services Compensation Scheme, which means any money held on deposit is not refundable if the firm goes bust.
QROPS is short for Qualifying Recognised Overseas Pension Scheme.
These pensions are designed for British expats or foreign workers who have UK pension pots.
The idea is to make their pensions easier to access on moving outside the UK.
Any personal pension or workplace direct contribution pension can transfer into a QROPS without losing the benefit of tax relief on contributions.
Another advantage is QROPS are outside the lifetime cap on a pension fund of £1 million. The total lifetime value of pension transfers into a QROPS must be less than £1 million, but once the cash is inside, no limits apply to fund size.
QROPS come with up to a 30% tax-free lump sum, pay direct to an overseas bank in a choice of local currencies and are paid gross with tax deducted in the country where an expat lives. Check out the tax issues where you live before taking the lump sum as some countries will tax the money – such as the USA, France and Spain.
Anyone living in a zero or low income tax place, such as Dubai in the United Arab Emirates would pay no income tax on their pension.
QROPS are direct contribution pensions and follow similar rules to the UK’s SIPP funds.
Important update: as of 9th March 2017 pension transfers into QROPS that aren't within the EU (e.g. Australia, New Zealand and Canada) are subject to a 25% transfer tax.
Two separate types of pension are grouped together in this category.
Final salary pensions can be public service schemes or gold-plated pensions offered by companies.
The value of final salary or ‘defined benefit’ funds is based on length of service and either the salary you are paid when you retire or a career average salary calculation.
The pension is index-linked and guaranteed for life.
Workplace final salary pensions can be transferred to a QROPS or direct contribution scheme, although many professionals advise against the move because of the risk of losing key benefits.
Public sector or civil service pensions are final salary schemes that cannot be transferred to a personal pension or QROPS.
Pension freedoms are the relaxed rules applied to how retirement savers over 55 years old can access their pots.
These rules were introduced for UK onshore pensions in April 2015 and will are due to extend to QROPS from April 2017.
Pension freedoms allow retirement savers four options for taking their cash:
Each option lets the retirement saver take a 25% lump sum. Only an annuity offers an income guarantee and a pledge that pension money will not run out.
That’s the question everyone would love to answer, but can’t.
The problem is no one knows how long they will live or if their retirement money will run out before they die.
Official longevity figures suggest a man is likely to live to 84 years old and a woman to 86 years old on average. The figure varies depending on factors like health and where you live.
A further complication is the age gap between couples. A man aged 65 should consider how to fund around 18 years of retirement, but if he has a wife aged 60, that spread increases to at least 20 years.
The fear of running out of money drives many retirement savers to put too much money aside as research reveals most people spend less than the equivalent of their salary when they give up work.
The rule-of-thumb is an ideal retirement income is two thirds of the salary earned before retiring, with a survey by government-backed pension provider Nest finding three out of four people were happy with a household income of between £25,000 and £30,000 a year.
That depends on you and the lifestyle you want to maintain, but the average figure is just under £2,000 a month, which covers running a home and car, hobbies, eating out and holidays.
The starting point is gathering pension statements. You can ask for a state pension forecast at any time.
Private pension firms send out an annual statement and many now have online dashboards that provide up-to-the-minute data.
Adding them up, including any earnings, rental profits, dividends and any interest on savings, will give some idea of income.
Next calculate your expenses. This budget calculator will help you work out the most common retirement costs.
Hopefully, your estimated income covers the expenses and leaves a little extra for emergencies and big ticket spending, such as buying a car.
Any shortfall must come from money generated by savings and investments.
If you move your home to another county for good, your tax liability usually moves with you.
The general rule is tax is paid on worldwide income where someone has their main home as well as strong personal and financial ties.
Take an expat moving overseas for a two-year job assignment who intends to return to the UK when the contract ends. If they keep a home, bank accounts, a car and other ties to the UK, they are probably UK tax resident.
Another expat living overseas for 10 years after selling up in the UK to move to another country for good is probably tax resident in their new home.
Pension income is generally taxed where you live but tax is not paid twice on the same money in different countries.
This is because of double taxation agreements between Britain and many other countries remove the problem.
If you are still paying into a UK onshore pension as an expat, the value of your fund can vary by a significant amount if you receive tax relief on the contributions.
To pick up UK tax relief on pension contributions, expats must:
Pension top-up relief depends on the rate of income tax a retirement saver pays.
For every £100 in the fund, a basic rate taxpayer (20%) pays £80 and the tax top-up is £20.
For the same £100 in the fund, higher rate taxpayers (40%) get £40 for every £60 contributed, while additional rate taxpayers pay in £55 for £45 tax relief.
No tax relief is added to QROPS contributions.
The answer depends on your status as an expat. Don’t think of SIPPS and QROPS in terms of the best pension, but more as the right tool for the job.
SIPPs are an option for expats who still retain UK tax residency as they will pick up tax relief on their contributions.
QROPS are worth considering for expats who have made a break from the UK and intend on settling in another country for good. Tax residency excludes them from claiming pension contribution relief, but QROPS may offer them other features and benefits.
A good independent financial adviser with a background in pensions and cross-border tax issues should steer the right course.
Finding a reliable and trustworthy independent financial adviser is a harder task than most expats expect.
Most countries have their own idea of regulated pension advice, but no international body supervises the industry.
The key is finding an independent IFA who is regulated and qualified to give pension advice in the place where you intend to live.
Avoid cold-callers, advisers you meet in a bar and get-rich-quick schemes. The chances are they will fail and end up with you losing your pension savings.
Always check out an IFA registrations and licensing and never hand money over without written guarantees of a refund with interest if the transaction is not completed within an agreed timescale.
A whole host of people want to know when you leave the UK:
When you reach your destination, the process is reversed as all the same organisations there will want to register you.
Expats will need the appropriate visas allowing them to live and work in their new country.
Lots of websites have pension and retirement information for expats:
Moving broad – The Pensions Advisory Service
Retiring abroad – The Money Advice Service
State pension if you retire abroad – Government website
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