If you’re a British expat it’s easy to let the State Pension fall off your radar.
In fact, most expats simply accept that periods abroad will result in gaps in their contribution record and write their State Pension off.
This is a big mistake.
While State Pension won’t solve the whole retirement conundrum, it is certainly one of the most cost-effective ways for many expats to create a secure tranche of income.
The new State Pension
The UK government reformed the basic State Pension on 6th April 2016.
If you reach State Pension age on or after that date you’ll get the new State Pension under the new rules.
The new State Pension is designed to be simpler than the old system
Those who receive the new State Pension will get £179.60 per week in tax year 2021/2022. This represents an increase of £4.40 per week on the previous tax year.
Over the course of a year, this is an increase of £228.80, taking the total annual income to £9,339.20.
Pensioners that reached State Pension age before April 2016 will see their weekly payments increase to £137.60, up from £134.25. This equates to a total rise of £174.20 over 12 months, and an annual income of £7.155.20.
Those who are in receipt of State Pension and resident in the UK are protected by something known as the “triple lock”. This ensures that their payments increase annually in line with whichever of the following is the highest:
- price inflation
- average wage growth
- 2.5 percent
British expats living in a number of other countries also benefit from their State Pension payments being increased in the same way as under the “triple lock”.
However, UK expats who live in countries such as Australia, New Zealand, South Africa and Canada do not.
They are known as “frozen pensioners”.
This is because their pension payments are frozen at their original payment level, irrespective of inflation.
This can cause big problems for those for whom state pension makes up a material part of their income.
For example, assuming inflation at 2.5 percent pa, after 20 years the current maximum pension of £168.60 per week would have an equivalent purchasing power of only £102.89 per week.
Who qualifies for State Pension?
If you have 10 years of relevant UK National Insurance Contributions, then you qualify.
You can find out how many years of contribution that you have here.
Are expats entitled to State Pension?
You can still claim for any State Pension you are eligible for if you have moved abroad.
Additionally, if you move overseas after you have started to receive your State Pension, and payment is made directly into your bank or building society, the payments can continue.
However, you should let the pension service know when you are going to leave the UK.
How do I get the maximum State Pension?
To get the maximum State Pension, you need to have 35 years of qualifying UK National Insurance Contributions.
Every year less than this will reduce your weekly pension by GBP5 (179.60/35).
How do I continue building my UK State Pension entitlement while an expat?
Your first step should be to find out your current State Pension entitlement.
You can do this by obtaining a pension statement here.
Alternatively, you can call +44 345 300 01 68 and request a statement be sent to you by post (be sure to have your National Insurance number handy).
Once you know where you stand, you can apply to make voluntary contributions using form NI38.
If you are employed or self employed, you should be able to make Class 2 contributions.
Weekly Class 2 contributions for tax year 2021/2022 are £3.05.
Yes, that’s right, sacrifice one Starbucks latte per week and you can maximise your State Pension entitlement for years.
If you are not working, then you will have to pay Class 3 voluntary contributions.
These are more expensive, at £15.40 per week (tax year 2021/2022).
This is still a great deal though, and should be considered for all those expat spouses out there who are stay-at-home parents or not working for other reasons.
Can I go back and make up gaps in my National Insurance record as an expat?
Yes. You can normally pay up to 6 years of arrears.
When can I start receiving State Pension?
State Pension age was 65 for men born before 6 December 1953 and between 60 and 65 for women born after 5 April 1950 and before 6 December 1953.
This is changing though. Going forward, State Pension age will increase to:
- 66 for men and women retiring in 2020
- 67 for men and women retiring in 2028
- 68 for men and women retiring in 2046
How do I pay tax on my pension if I live abroad?
You may be taxed on your State Pension by the UK and the country where you live. If you pay tax twice, you can usually claim tax relief to get all or some of it back.
If you live in a country that has a double tax treaty with the UK, you will only pay tax on your pension once. This may be to the UK or the country where you live, depending on that country’s tax agreement.
What happens to my State Pension if I contracted out?
Your pension might be lower if you were previously contracted out.
Being contracted out means paying lower National Insurance Contributions and having the money paid into another form of pension instead, e.g. a final salary pension scheme at work or a workplace, personal or stakeholder pension (prior to 6th April 2012).
If you worked for a public sector organisation (e.g. NHS) this is likely to have been the case.
What happens if I defer taking State Pension?
For each year you defer taking your State Pension, you’ll get just under a 5.8% increase in your pension when you do start taking it.
However, you cannot take the deferred amount as a lump sum and there is no inheritance by a surviving spouse or civil partner of the extra state pension built up from deferral of State Pension.
According to research in the Telegraph, retirees will need to live to until at least 81 to recoup the tax benefits from deferring their state pension,
Deferring the state pension is essentially a gamble on your own life expectancy.
It would probably be better to take the state pension when it is due and invest it if you don’t need it.
The State Pension in the UK is expensive for the government to maintain. As a result, it is not impossible that it could be altered in future.
This could be in the form of further increasing the age that it can be received.
Alternatively, the “triple lock” could be watered down or scrapped altogether.
Voluntary contributions cannot be refunded so you shouldn’t pay more years than you need to.
This can be difficult if your plans aren’t certain. If you are living abroad and are currently missing NIC years, but might go back to the UK and would then reach the necessary 35 years anyway, then don’t plug any gap just yet.
As mentioned previously, you can normally pay up to 6 years in arrears, so if you later decided to stay overseas you can still build up your contribution record retrospectively.
Finally, you may not get the full new state pension even with 35 years contributions.
This is because the rules are complicated. For example, if you were a member of an occupational pension scheme that was “contracted out” (a final salary scheme for example) then you paid less in NICs so will have accrued less state pension rights.
Additional contributions can still improve this though.
Case study – Why voluntary National Insurance Contributions can be a great deal for expats
To illustrate the benefit of making voluntary National Insurance Contributions, let’s use a real case study.
I have a client who is a British expat. Let’s call him Stephen (not his real name).
Stephen used to work in the UK and built up 20 years of qualifying National Insurance Contributions.
He left the UK ten years ago and has no intention of going back to old blighty .
Exactly what Stephen will get from his State Pension will depend on various factors: inflation, where he will retire and how long he will live. So let’s make some assumptions and develop our scenario…
We’ll assume inflation at 2.5%, that Stephen will live until aged 86 and that he retires in one of the countries where his state pension would currently continue to be increased in payment.
Based on his current contribution history, Stephen’s State Pension accrued is worth £5,336.69 in tax year 2021/2022 (20/35 X £9,339.20). He is 51 now, so has another 16 years until he reaches his state pension age.
Stephen has taken good advice and started to boost his UK state pension rights by paying Class 2 voluntary contributions.
He will pay £158.60 this year, and increased with inflation, a total investment of £2,844 over the next fifteen years.
But in return he would receive an additional £148,061.76 of pension if he lives until age 86!!! Remember that latte that I mentioned earlier?
Let those numbers sink in for a moment…he gives £2,844 and he gets back £148,061.76.
Most British expats should be looking at making voluntary National Insurance payments if they don’t already have 35 years worth of qualifying contributions.
It could be one of the best investments you make.