Receiving your pension as an expat can be more complicated than it should be, and with the UK expat population rising steadily, it's a good idea to get clear on all the intricacies of receiving your pension in a country with a different currency to the British Pound.
The top reasons expats cite for moving out from the UK are a better quality of life, economic reasons and love. The Expat Insider 2018 poll also highlighted a crucial aspect of the UK expat population. About 51% of them may not return to the UK. What happens to this population as far as pension arrangements are concerned?
This guide will discuss all the retirement aspects for UK expats, their pension options, and key life decisions on whether to leave their pension in the UK or send it abroad to their host country. Let’s unpack the details!
With the ever-changing state pension age, knowing that you’ve finally retired and can access your pension can be such a moment of relief. If you retire outside the United Kingdom, understanding how the pension system works for expats can help you in making a decision on the best way forward in respect of your pensions and how to make a claim from abroad.
The Options You Have on Retirement
As from April 2011, the Default Retirement Age was scrapped and you can now work beyond 65. However, now that you are already retired and moved or planning to move abroad, the following are the options available as far as receiving your pension is concerned.
Option 1: Leave Your Pension Pot with the Same Provider in the UK
You may opt to leave your pension in the UK. If the pension is a defined contribution plan, you can access part of your contributions as from the age of 55. Other pension plans may also allow you to withdraw up to 25% by the age of 55 tax-free.
In case you decide not to withdraw or you are not eligible, you’ll have to wait until you attain the state pension age. The pension will be subject to ongoing annual management fees that range from 0.75% to 1.5% per year.
Ensure you register for regular updates to track the performance of your pension scheme while overseas.
Option 2: Move Your Combined Pensions Abroad
All other factors remaining constant, if you become a tax resident overseas for more than 5 years, you lose tax relief benefits on your UK pension contributions. This and other factors make it sensible to move the pension to a recognised overseas pension scheme (ROPS) also known as qualifying recognised overseas pension scheme (QROPS).
Some of the benefits of this approach include:
Tax advantages-If you move the pension to a jurisdiction with lower tax rates than the UK, you’ll pay less to the tax authorities.
From the age of 55, you can qualify for a 25-30% tax-free lump sum
Even past the Life Allowance Limit currently set at £1,055,000, you will still enjoy tax-free growth.
Option 3: Transfer to a Different Pensions Plan within the UK
It is your statutory right to move your pension to any preferred pension scheme registered in the UK. You may even transfer to a self-invested personal pension (SIPP) where you enjoy some control and flexibility of your pension.
The flexibility SIPP gives you include the opportunity to decide where to invest your pension money. You can choose Investment Trusts, ETFs, direct stocks and other funds. You also have the option of making withdrawals from your pension starting at 55 years.
However, not moving your pension from the UK means that you will be subject to the UK pension regulations and any taxation changes.
Deciding on the right option
Having looked at the three options above, you may be wondering where all this leaves you. How do you make an informed decision on the best option as per your circumstances? Read on, to find out what you need to consider when choosing your option!
What Happens to the State Pension?
If you decide to move out of the UK when you’ve started enjoying pension payments, you need to alert the pension service of your decision.
Normally, State Pensions are paid worldwide irrespective of the country you chose to live. However, for you to enjoy the yearly increases you need to retire in a country that has a social security arrangement with the United Kingdom or a country within the European Economic Area (EEA) including Switzerland or Gibraltar. The other option is for you to live in the UK for 6 months each year.
Transferring Your Final Salary Pensions Overseas?
If you are a member of a final salary defined benefit scheme, you may want to move your pensions abroad. There is no law that prevents you from doing the transfer. However, the Financial Conduct Authority (FCA) requires that individuals whose final salary pensions schemes are worth £30,000 or more, should first seek professional advice from pension experts before moving their pensions.
As part of the pension freedoms, you are also entitled to a 25% tax-free lump sum. This means you can benefit from your pension much earlier as you wait for the state pension age.
This could be a huge amount that requires a reliable and low-cost transfer service such as RationalFX to send it across to your country of destination. In fact, the exchange rates RationalFX charges for both exotic and standard currency pairs is almost the midmarket rate save for a small margin they add to cover their operating expenses and leave a little for profit.
Taxation impact on your pension abroad
Starting from March 9, 2017, any pensions that are transferred from the UK to a QROPS could be subjected to a 25% Overseas Transfer Charge. This means a quarter of your pension funds could go to the HMRC. The only exceptions to this are:
If you are a tax resident in the country where your QROPS is located
If you are a tax resident is an EEA country and your QROPS is also based in an EEA country
If you choose to leave your pension in the UK, you’ll be taxed for the pension income much like any person living in the UK.
What are tax reliefs and limits?
You’ll only get relief if you are considered a UK resident for tax purposes. However, retiring in a different country and becoming a tax resident there for more than 5 years will make you lose any tax relief benefits on your UK pension contributions.
If in any year of income, you’ve been present in the UK for 183 days, you’ll be considered a tax resident and you will pay tax on your pension and be entitled to tax relief as well.
Can You Receive Two-State Pensions?
Yes, it is possible for you to receive your UK state pension and the state pension of the country you are living in as long as you made contributions.
Sending your pension abroad
If you have made contributions to the UK National Insurance or any other pension schemes in the EEA or non-EEA countries in the course of your working life, you can make a claim from your country of residence. The following are the steps you need to take to get your pension.
Step 1: Establish the Different Pensions You Enrolled
Apart from your state pension, you may have had a workplace pension, personal pension and state pensions from other countries.
Step 2: Get the Pension Statements
This will help you establish how much you contributed and the amounts due to you from each pension fund. For the UK state pension, you can easily get the State Pension statement.
Step 3: Make A Claim
For you to claim UK state pension, you must be within 4 months to the state pension age. If your age qualifies, contact the International Pension Centre or send them the claim on email or post.
For claims involving state pensions from other countries that you contributed, check out the following scenarios:
Scenario 1: (EEA) Countries, Gibraltar and Switzerland
Make your state pension claim in the country you worked or lived last. You will get all the other country's state pensions including the UK if you contributed.
Scenario 2: Countries Outside the EEA
Claim your pension separately from each country you contributed. The pension service in the respective countries can be of great help.
Step 4: Choose Where to Be Paid
Inform the pension authorities on the country you would like to be paid in. Most private pensions and workplace pensions will pay into your UK bank account and you’ll have to transfer to the country and bank of your choice.
On the other hand, state pension can be paid into your UK bank account or an account in the country you live in. The best approach is to have your payments done in the UK and then look for a reliable money transfer service provider like RationalFX that will offer you favourable exchange rates and lower transfer costs.
Step 5: Determine the Frequency of your payments
You have the option to choose a once every 4 weeks payment plan or a once every 13 weeks pension payment plan. Where the state pension is less than £5 per week, you’ll receive a yearly payment every December.
Why use a money transfer service?
Sending your pension abroad can get very costly very quickly. Making recurring payments abroad can impose a lot of unnecessary charges over time, costing you more than you think.
One of the ways to minimise the cost is to use a reliable money transfer provider, who offers a pension transfer service. These companies charge lower fees, helping you save on recurring payments abroad.
Who to choose to handle your pension transfers?
We’ve analysed a number of providers, and found RationalFX to be one of the most suitable companies for sending your pension abroad without overpaying.
RationalFX is a trusted money transfer company registered in England as Rational Foreign Exchange Limited. It is authorised by the Financial Conduct Authority, regulated by Her Majesty's Revenue and Customs (HMRC) and boasts of a solid financial base.
RationalFX serves both personal and business clients looking to transfer money to different parts of the world. It supports over 50 global currencies, giving you numerous transfer options.
Regular Payments – Since your pension is a recurring payment, you’ll find it convenient to use the regular payment plan RationalFX offers its personal customers. As opposed to bank commissions, sending and receiving charges, this plan charges you no fees with a better exchange rate and means you can set up a standing order so your pounds are converted into your desired currency and transferred on the same date every month. You can even choose to fix the rate for between 6 and 24 months, meaning you know exactly how much you get for your GBP for the period of that contract.
Transferring as and when is convenient – you may not need the money each month, or wish to wait for when you like the look of the rate. Make a transfer whenever suits you by either speaking with your own Account Manager or fixing the rate online. This is still done at a great rate and without fees.
Targeting a rate – with your Account Manager you can discuss an exchange rate you would either like to book a one-off trade at or fix and Regular Payment at. If that price becomes available we will contact you and give you the option to trade.
As an assurance to pensioners in the EU, the UK government has made it clear that deal or no-deal Brexit, their state pensions will continue being uprated up to 2022. Thereafter, uprating will depend on whether or not Britain has reciprocal arrangements with the EU country you retire in.
We worked with RationalFX to get the most accurate rates for this independent comparison - if you would like to find out more about their award-winning service click here
Jonathan is the founder and editor of MoneyTransfers.com. Having previously worked in the FX trading industry and observing the ways money is exchanged to create wealth for traders, Jonathan gained a passion for how currency is exchanged. Using this knowledge he discovered a need for transparency and education to help people save money on their online transfer, leading to the creation of MoneyTransfers.com