Don’t pack the factor 25 yet!

Andrew Tully warns about the potential pension issues that arise when a client retires abroad

Retiring to sunnier climates is a reality for many Britons today, with more than one million people currently receiving their state pension overseas.¹ Moving abroad can be both a nerve-wracking and exciting adventure. Either way, it is important people have easy access to all the information they need about moving abroad. If you have clients who fall into this group, there are numerous practical considerations, both financial and otherwise, which they need to take on board before they start packing their swimsuit and factor 25.

While those retiring overseas are unlikely to be relying solely on the UK basic state pension, it will be part of their future income stream.

A bit of a snag

However, there is a significant snag. If an individual moves abroad permanently, any increases in their UK state pension will only apply if they are living in the European Economic Area – including Gibraltar and Switzerland – or a country with a reciprocal social security agreement with Britain.

People living outside these areas will see their state pension frozen at the amount paid when they first claimed (or if the pensioner emigrated more than one year after payment began, at the rate in force when emigrating). Popular retirement countries outside these reciprocal agreements include Australia, Canada, New Zealand and South Africa.

As an example, the top six countries which Standard Life pays private pensions to are Spain, France, USA, Canada, Ireland and New Zealand – a list which contains two countries where state pensions would not be indexed. It is estimated that around 540,000 pensioners are living in countries where the UK basic state pension is frozen¹ – almost half of the total number of people who have retired abroad.

Potential impact

The impact of a frozen basic state pension can be fundamental, with the benefit potentially halving in real terms over a 20 year period.² For example, someone who retires abroad today to a country which does not uprate the basic state pension in line with the UK would continue to receive £97.65 (assuming they qualify for the full pension). However, a comparable individual who remains in the UK would see their pension increase to £205.73 after 20 years, assuming the basic state pension is increased by 4% each year.

So, if the country your client is intending to retire to does not have a reciprocal agreement, careful consideration needs to be given to ensure retirement income is sufficient to cover their living costs over a long period of time.

In addition to state pensions, people clearly need to consider their company or personal pension. It may be possible to transfer this to an overseas arrangement although this is a complex area, which has many pitfalls. Alternatively, the pension could be left within the UK scheme and taken as normal when the client wants, or needs, to access their tax-free lump sum and pension income. However, it is still important to check the details. Some schemes may not allow pension payments to be made into a non-UK bank account, or may impose a charge for doing so. In addition, HMRC may allow gross payments to be made, without the deduction of tax in the UK, depending where the individual resides.

While pensions are only a small part of the overall planning which people need to do before moving abroad they should not be overlooked. Most people assume the state pension is a basic right which will increase over time. Helping clients understand that this is not always the case is a crucial part of their financial planning, and will hopefully help deliver the retirement of their dreams.

Sources
¹Parliamentary briefing paper, March 2010 www.parliament.uk/briefingpapers/commons/lib/research/briefings/snbt-01457.pdf
²Standard Life calculations, August 2010-08-19

Top tips for retiring abroad

1. Check what reciprocal basic state pension agreements are in place with the destination country, if any.

2. People should inform their social security office, HM Revenue and Customs, and the Department for Work and Pensions when they move and provide contact details abroad.

3. Forecasts of state pensions are available by completing a BR19 form or go to
www.thepensionservice.gov.uk. If already overseas, complete form CA3638 or call The
International Pensions Centre on 0191 218 7777.

4. People need to consider when their state pension benefits will commence. For women, the state pension age is rising from 60 to 65 between 2010 and 2020. Further rises, for everyone, to age 68 are currently expected to take place by 2048, although the coalition government may accelerate these changes.

5. For private pensions, people need to consider whether to transfer these to an overseas
arrangement or leave them in their UK arrangement.

6. When private pensions in the UK come into payment, people who are non-resident may not pay UK tax, if the country they live in has a double taxation agreement with the UK. The forms to be completed vary by country and can be found on HMRC’s website:
http://www.hmrc.gov.uk/incometax/tax-leave-uk.htm

7. People should tell their bank, building society and any other financial institution that they have a policy or agreement with that they are moving abroad.

Andrew Tully is senior pensions policy manager at Standard Life