Many UK residents and expats alike choose to spend their retirement overseas. Whether you wish to remain in the country you now call home, finally move into your beloved holiday home or simply take a long-term holiday from the British isles, there are many reasons why you may choose to spend your retirement as an expat. But before you take the plunge and embark upon your new life, it’s important to plan carefully for your retirement to ensure you can afford the post-work lifestyle you’ve always dreamed of.
We have put together a guide to expat retirement planning which will help you as you embark upon your overseas retirement journey, no matter how long you have been seeking a new life abroad.
Private pension options
The first step in expat retirement planning is to begin saving as soon as possible. Whether you are decades from retiring or it is just a few short years away, it is important to start as early as you can. This will help to make the saving process easier to commit to in the long term. One of the most popular methods of saving for retirement is to start making contributions to a private pension scheme. Private pensions are an ideal option for anyone with some extra cash, regardless of how much you may have to spare.
No matter whether you currently live in the UK or overseas, if you choose the right type of private pension scheme, you can transfer your pension to your retirement destination of choice once the time is right for you. Creating or moving a private pension pot overseas can provide you with access to a number of benefits, including tax-free growth and a wider range of investment choices. You will also have a greater range of options when it comes to withdrawing the money you have saved, so you will be able to adapt your pension with ease should your retirement plans change.
Can I move my pension abroad?
If you choose to begin your private pension contributions while still living or working in the UK, you may wonder whether you will be able to move your pension abroad when you retire. Thankfully it is common for expats to move their pension abroad — all you need to do is ensure you transfer to a qualifying pension scheme. Known as a QROPS, a qualifying pension scheme makes it possible to move your money without being taxed, so you won’t lose out on any of your hard-earned savings as a result of transferring it to a new country. However, there are some criteria your new scheme will have to meet in order to benefit from this type of transfer. The three conditions include:
- It must meet tax recognition conditions: The scheme must be recognised for tax purposes in the jurisdiction within which it is registered and be open to people living within this area. It must also be registered with the jurisdiction’s tax authority, and tax relief must be offered on member contributions.
- It must be regulated by a pensions body: The pension scheme must be recognised and regulated by the local pensions body within the jurisdiction it has been set up.
- It must be recognised abroad: The same tax rules that apply to the pension’s benefits must apply to both tax residents and non-residents.
As with any investment, it is important to do your research and ensure you are aware of all the pros and cons of the particular pension scheme you have chosen. Every private scheme is different and it is important to avoid any opportunities that seem too good to be true, as they usually are. But these potential risks aside, there are a number of general benefits to creating or moving a pension overseas that have attracted many expats who are seeking a better retirement. These include:
- Potential for tax-free growth
- Tax based on local laws, including low or no tax rules
- A wider range of investment choices
- Easy-to-consolidate multiple pensions
- Can be used to increase a spouse’s pension
Of course, it’s also important to prepare for your plans to change. Should you choose to move back to the UK after you have started saving in your private pension, you can transfer to another QROPS with ease. What’s more, only 90% of the income you make from a QROPS will be taxable when you return.
Planning for your state pension
While it may seem like an odd suggestion, it is both possible and advisable to carefully plan when you will receive your state pension as part of the ex-pat retirement planning process.
How much expat state pension will I receive?
The amount of state pension you receive is largely based on the amount of National Insurance Contributions you have made. If you have paid contributions for more than 35 years, you will receive the full state pension, which in the year 2020-21 is £175.20 a week. If you have contributed for more than 10 years but fewer than 35 years, you will still receive the state pension but you will receive a smaller amount based on the contributions you have made.
Another factor to consider when working out how much you may receive is the impact on inflation? The new state pension, which came into force on April 6th 2016, adjusts each year based on inflation and the average wage. Under this ‘triple lock guarantee’ system, which came into force in 2010, pensioners receive a minimum increase of 2.5% on their pension payments each year to ensure the amount received rises in line with the cost of living. In order to benefit from this increase, however, you must live within the European Economic Area. If you live outside this area, you must plan for your pension payments to be frozen at the same level as the first payment. This freeze will remain in place until you return to the UK.
How can I boost my state pension?
The reason it is so important to plan for your state pension is that it is possible to boost the amount you receive. According to UK law, those eligible for the UK state pension can delay or pause their pension at any point and receive interest in return. When you pause your payments, the UK Government will pay interest of 5.8%, which is greater than any interest you could make on your money if it was sitting within a bank account. As a result, many expats choose to extend their time at work in order to boost their contributions and receive interest on their pension. If you are already an expat, you can only delay or hold your pension once. However, just a single pause in your pension payments could have a significant impact on the amount you receive each month. Delaying retirement could also give you the opportunity to meet the 35-year contribution level if you are currently below the threshold, which will allow you to receive the full state pension.
Still unsure about your retirement savings options?
We hope our guide has provided you with the help you need to begin your retirement planning. However, we specialise in providing general advice rather than personalised guidance. If you feel you are in need of extra help with your personal retirement plan, we recommend you contact an independent financial advisor who can help you consider the options that are best for your personal finances.