Should you retire abroad?

Check the regulations governing pension savings carefully before you decide to retire abroad.

senior couple on the beach
(Image credit: Getty Images)

Britons returning from summer holidays abroad may be tempted to retire abroad. If so, you’ll need to think about how to manage your pension income once you’re living overseas. 

The good news is that your private pension – income from a personal or workplace scheme, say – can be paid to you wherever you choose to live. You will also be entitled to the same annual pension increases as you would get if you were still living in the UK.

However, check what arrangements your pension provider offers for international retirees. Some providers will only make payments to a British bank account. That may be problematic if you decide to bank locally. You may need to maintain a bank account at home for this purpose, or switch to a new pension provider.

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Mind the exchange rate

The other important issue to consider is exchange-rate volatility. Your UK pension will be paid in sterling, which you’ll need to convert to the local currency wherever you retire to. That will inevitably mean your effective income rises and falls in value as the exchange rate changes; that’s a risk that you will need to plan for, although your bank may be able to help you mitigate the danger.

It is also important to take advice on your tax position. Even if you’re no longer a UK resident, you are usually still liable for tax on UK income, including income from a UK pension, and you may need to file a self-assessment tax return with HM Revenue & Customs. You may also be liable for tax on your pension income in your new country of residence, although many countries have double taxation agreements with the UK to ensure people aren’t taxed twice on the same money.

One way round some of these issues may be to transfer your private pensions in the UK to a pensions provider based in the country to which you move. That way, you’ll be able to receive income in the right currency, with no liability to tax in the UK.

However, HMRC only allows transfers to schemes in other countries that it has specifically approved. These are known as qualifying recognised overseas pension schemes (QROPS). And these transfers are complex. You should take expert independent advice from a financial adviser who specialises in expatriates’ affairs.

There are also complexities to explore when it comes to your state pension entitlement. You’ll be eligible to receive all the benefits that your national insurance contributions qualify you for wherever you choose to live in retirement. And non-residents don’t normally have to pay any UK tax on their state pension. 

Less happily, you will only qualify for annual state pension increases if you move to certain countries, including those in the European Economic Area and those where the British government has reciprocal deals in place. That isn’t the case in many countries popular with UK expatriates, including Australia, Canada and several Caribbean nations. If you move to one of these nations, your state pension will be frozen for good at the level payable when you start claiming.

Finally, if you choose to move overseas before you reach retirement age, you can continue to contribute to your UK pension schemes to build up future benefits. But the amount of tax relief you can claim may be limited, or even zero. Your entitlement will largely depend on the value of your income that is deemed to be UK earnings for tax purposes.

Find small caps with big profits

Chancellor Jeremy Hunt believes reforms that would encourage occupational pension schemes to invest more in early-stage companies will benefit savers as well as driving vital investment in start-ups. The returns from private-equity and venture-capital investment could boost savers’ pension pots by as much as 12% by the time they retire, Hunt claims. Pension experts aren’t convinced, pointing to the additional risk that comes with investing in small businesses. Some start-ups deliver stellar returns while others are complete flops. Still, the long-term record of professionally managed funds offering diversified exposure to these businesses is impressive. 

One recent analysis of investment trusts focused on private equity found they had delivered growth in net asset value of 301% over the past ten years, compared with 187% and 76% respectively from the MSCI World and FTSE All Share indices of listed firms. And many pension savers don’t have to wait for Hunt’s reforms if they want to invest in such funds. 

These investment trusts can easily be bought and sold in your stakeholder or self-invested personal pension. That’s not to say they are suitable for everyone; limiting your exposure to a small percentage of your overall pension is sensible. But these are easily accessible funds with a strong record. 

Wise up to PensionWise

l Private pension savings could lose their exemption from inheritance tax (IHT) under new proposals from the government. Draft regulation published as part of a consultation exercise on how to abolish the lifetime allowance (LTA) on pension savings effectively abolishes the exemption, pension experts warn. That would hit thousands of families who since 2015 have been able to pass on unused pension savings to the next generation without the money counting towards the value of the estate for IHT planning purposes. However, ministers insist the draft regulation is not finalised, with other approaches under consideration.

l Pension annuity rates have now increased by almost 50% over the past two years, new data from Hargreaves Lansdown reveals. The adviser says that back in 2021, a 65-year-old with a £100,000 pension could have bought an annual annuity income worth £4,949; today, the equivalent figure is £7,358. The dramatic increase, which reflects the Bank of England’s series of interest-rate increases, has seen a resurgence of interest in annuities.

l Pension Wise, the state-funded service that offers free consultations to savers over 50 who are considering their retirement options, continues to be overlooked. Fewer than one in five savers use the service when accessing their pension savings, according to data from the Financial Conduct Authority, the City regulator, even though it enjoys high approval ratings from those who have had a telephone or face-to-face Pension Wise appointment. See for more details.

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David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.