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Pensions for Expats in the United Kingdom

Submitted: July 2013

The UK has a state pension regime as well as a tax-efficient private pension system.

The state pension age is currently 65 for men, and slightly above 61 for women. It is gradually rising to 66 by 2020 for both genders, before rising further to 67 by 2036 and to 68 by 2046. A pensions bill proposes to bring forward the increase to 67 by 2028 and to automatically link the state pension age to life expectancy.

 

UK State pension

UK state pensions are contribution-based, and contributions must be paid as part of your National Insurance Contributions (NICs). NIC rates can be found here. State pension payouts are taxable. As NICs do not attract tax relief, economic double taxation may arise.

You get the full state pension (currently £110.15 per week) if you have at least 30 qualifying years in your NIC record.

Under current law, there is a two-tier system whereby all workers contribute towards a basic state pension whereas some employees contribute also towards an additional state pension (or second state pension).

If you contribute towards the additional state pension, you can opt for a “contracting-out rebate” and instead pay into an occupational salary-related pension scheme, if you employer has any. You lose your entitlement to the additional state pension for the contracted-out period only.

In 2013, the Government has announced that the additional state pension would be abolished, as the UK would move gradually towards a “single-tier” system. The full rate state pension would be £144 per week in today’s value, and you would need to have at least 35 qualifying years to get the full rate. Consequently, the additional state pension and the contracting-out rebate would be abolished for claims after 6 April 2016, subject to transitional rules.

Although this pension reform has yet to be debated, it aims at putting less strain on UK public finances over the long run. However, some will benefit from the reform while others may lose considerably. Therefore, you might wish to check your individual situation and plan your pension arrangements carefully.

 

Expatriates and UK State pension

Under current law, most individuals need at least one qualifying year to get any state pension (exceptions apply to certain individuals already above state pension age). Under the pension reform, you would not get any UK state pension unless your National Insurance record shows at least 10 years of contributions. EU pension rules may mitigate this, but expatriates should pay attention to this specific rule, especially if they are not from the EU. For more information on EU pension claims, click here.

 

Benefits for UK resident low-income pensioners

Benefits for the elderly are primarily contribution-based. However, the Government may pay additional benefits for individuals above pension age. These include, but are not limited to:

  • Pension credit
  • Housing benefit
  • Winter fuel payments
  • NHS benefits
  • Free TV licences, and
  • Free bus passes.

These benefits are not necessarily means-tested.

 

UK-based pension schemes

Expatriates may decide to build up a private pension pot, whereby contributions are subject to tax relief and the capital can grow tax-free. In addition, you may withdraw up to 25% as a tax-free lump sum when you reach pension age. Pension schemes can be either occupational or personal. You can also sign up for a Self Invested Personal Pension (SIPP). See Investment for Expats in the UK.

To qualify for tax relief, you must contribute to a Registered Pension Scheme (RPS). Tax relief is available on contributions up to the lower of:

  • 100% of your pensionable earnings for the relevant year or £2,880 (whichever is higher);
  • The annual allowance for the relevant year, and;
  • The lifetime allowance.

The annual allowance and the lifetime allowance are currently £50,000 and £1.5m respectively, but they are set to decrease to £40,000 and £1.25m from 2014/2015.

 

Qualifying Recognised Overseas Pension Schemes (QROPS)

If you eventually plan to emigrate from the UK, you might consider transferring your pension pot into a QROPS.

QROPS are non-UK pension schemes which comply with HMRC rules on funds that initially attracted UK tax relief. HMRC publishes and regularly updates a QROPS list, which includes only overseas pension schemes that have chosen to be on this public list and notified HMRC that they meet QROPS rules.

Some unlisted pension schemes may meet QROPS rules whereas some listed pension schemes may not be compliant at all. However, non-complying pension schemes are normally caught only after HMRC investigation.

Failure to comply with QROPS rules may attract a tax charge of up to 55%, depending on the circumstances. Therefore, it is essential to be very careful when you choose your QROPS. You might wish to seek professional advice on QROPS matters. See Wealth Management for Expats in the UK.

 

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