Many Britons choose to head abroad in search of better weather or cheaper living – but it’s important to sort out your pension arrangements before you leave the country.
Thousands of Britons retire abroad each year. But before you jump on a plane to sunnier climes, make sure you understand how it will affect your finances. Expat retirees will need to make a number of decisions about what to do with their pensions.
Getting your state pension abroad
Most retirees will be relying on income from either their state pension, a private pension, or both. Assuming you’ve paid enough UK National Insurance contributions to qualify, you can claim the state pension while you’re abroad. However, the country you move to determines whether you will benefit from any annual increases in the state pension once you arrive.
“Currently, if you retire to a country which is in the European Economic Area, Switzerland or Gibraltar, you will receive any annual increases in your state pension. The same applies if you retire to a country that has a social security agreement with the UK, like the US, for example,” says Jamie Jenkins, pensions expert at insurer Standard Life. “However, you won’t receive annual increases in your state pension if you retire to other countries where there is no social security agreement in place. This includes some popular destinations, such as Australia. There are also two notable exceptions to the social security agreement rule – if you retire to New Zealand or Canada, even though there is an agreement in place, you won’t receive any increases in your state pension.”
“Which country you move to will determine whether your UK state pension gets increased in retirement”
There are 120 countries where the UK government refuses to provide the annual inflationary increase, according to the International Consortium of British Pensioners, which campaigns on this issue. As well Australia and South Africa, the list includes some British overseas territories, such as the Falkland Islands, Montserrat in the Caribbean and the South Atlantic island of St Helena. Retirees living in these countries find their payments remain frozen at the same amount as when they first received their overseas pension. However, their pension would go back up to the current rate should they later return to live in the UK.
If you’re classed as a “non-resident” you won’t usually pay UK tax on your state pension. However, you might have to pay tax in the country in which you now live.
Drawing on a work or private pension
If you have another pension in the UK – whether a defined benefit (final salary) scheme or a defined contribution (money purchase) arrangement – you will be able to leave your pension in the UK. For defined contribution pensions, you will also have the same range of options that UK-based retirees now have under the pension freedom rules: take part of your pension as cash, buy an annuity, use income drawdown, or combine these options.
A UK resident is potentially liable to UK income tax and capital gains tax on worldwide income or gains. However, if you are no longer a UK resident, special rules apply. The basic tax rule is that non-residents are only charged tax on income arising from a source in the UK. This will include pensions from workplace schemes or personal pension plans. Unfortunately, you might also be taxed on your pension income in the country to which you have moved. However, “there may be options where pension payments made from the UK are taxed only once in the country of receipt. This will generally be where a double taxation treaty exists between the UK and the other country”, says Steven Cameron, pensions director at insurer Aegon.
Indeed, if you move to a country with very low, or zero, income tax and a double taxation agreement, you could potentially find you won’t have to pay tax on your pension if you become a resident there. If, on the other hand, you move to a country with which the UK does not have a double taxation agreement, you may find you’re taxed twice – once on payment from the UK and once on receipt in the country you live in. However, if this is the case you may be able to claim UK personal tax allowances, which can reduce the amount of tax due to be paid.
Some expatriate retirees move their pensions abroad into a qualifying recognised overseas pensions scheme (QROPS) – but this is a big decision and it’s important to take independent financial advice from an expert in this area. A QROPS is an overseas pension scheme that meets certain requirements set by HM Revenue and Customs (HMRC). Transfers to non-qualifying schemes are likely to result in a 55% tax charge, with the possibility of additional penalties, plus your pension provider could also be fined by HMRC for allowing the transfer.
Transferring your pension overseas could change the amount of money you get in retirement. You may have less choice about what you can do with your pension pot, especially since the UK pensions freedom rules came in, since these offer exceptional flexibility. You might also have to pay higher charges or end up with a bigger tax bill.
“Pensioners moving abroad are a target for scams, so be wary of offshore financial advisers”
If the QROPS is in a country that taxes pensions at a minimal or even a zero rate, a pension transfer might potentially have tax benefits. Consequently, some people have been advised to move their pensions out of the UK and into a QROPS not because they were moving abroad, but to avoid tax. However, the 2017 Budget introduced a tax charge of 25% on the value of a QROPS transfer to deter people from doing this. The new rules still come with “exemptions to allow pensioners with a genuine need to do this to do so tax-free”, says Stuart Paton Evans, retirement propositions director at Scottish Widows. The main aim of the clampdown is to tackle “pensions scammers who have looked to utilise QROPS to scam pensioners out of their savings”.
Pensioners moving abroad are a key target for scams, so it’s vital to be wary of offshore financial advisers, who often cold call you to try to persuade you to move your pension fund overseas. Offshore financial advice is not regulated by the Financial Conduct Authority, the UK industry watchdog, and is often poorly regulated or not regulated by the authorities in the countries in which these firms are based. Such advisers – more accurately described as salespeople – are driven by the large commissions on offers from QROPS transfers, which can leave a big dent in your pension.
Taking expert advice to manage risks
If you’re drawing a pension in sterling but have living costs in a foreign currency, you are exposed to currency risk. You may also find that UK pensions will not make payments to a foreign bank account, meaning that you incur extra costs. Some people argue that transferring your pension abroad is the best way to tackle these problems. That said, it is usually possible to mitigate risks and costs while still keeping your pension onshore under UK regulation and covered by UK protection, by shrewd use of Sipps (some of which are extremely flexible and allow you to hold foreign currency), multi-currency bank accounts and/or cheap foreign exchange transfer services. So transferring your pension abroad is not automatically the answer – and because of the costs involved it may only be right for a very small number of retirees.
So retirees living abroad, or planning a move, should engage the services of a UK-regulated fee-only independent financial adviser before making any big decisions. This should ensure you get high-quality advice, competitive products and regulatory protection. However, “finding a trusted adviser can be a challenge as there aren’t many who can advise on QROPS”, notes Tom McPhail, head of policy at Hargreaves Lansdown. “Get a recommendation from someone you trust if you can. Always work on clearly defined fees, and be prepared to challenge their proposed terms.”