How does the UK pension freeze affect expats?

ExpatRoute is here to help you make sense of the UK’s state pension freeze and how this might affect you and your life abroad.

The UK pension freeze has been one of the biggest challenges for expats to overcome when living abroad.

Pensions are an effective way of investing in your retirement and future post-work, particularly for those starting new lives overseas. Alongside any savings or private pension, the state pension can be a much-needed source of income for some retirees.

However, for some expat pensioners, their state pension has been frozen since they left the UK, meaning they’ve missed out on any uprates offered to those living in the UK. For some, it’s a loss of money that has led to them having to change their retirement plans. Let’s look into how this expat pension freeze has affected different sections of the expat community.

How state pensions work

The state pension was introduced in the early 20th century to provide everybody in the UK with a foundation of income to support them in old age once they had finished working.

All British state pensioners receive a state pension as long as they match the qualifying criteria. This pension comes in the form of a weekly payment made to those who have at least ten years of contributions to the National Insurance Fund. You need to have more than 35 years to qualify for the full amount. If you do not have this, then the figure you will receive will be reduced proportionately.

The age at which you can access the state pension varies depending on when you were born. The current age is 65 years old for both men and women, but this is expected to rise in the coming years.

You can check when you will be eligible to access your state pension on the UK government’s website. If you qualify for the full amount of new state pension, you will receive £175.20 per week, or £9,110.40 a year (this is for the tax year 2020/21).

The pension triple lock

All pensioners who live in the UK receive an annual uprate or increase to their pension. This is known as the ‘triple lock’ and was introduced back in 2010 to ensure pensions did not decrease in value.

The state pension will increase by the greatest of the following three measures:

● average earnings
● prices as measured by the Consumer Prices Index (CPI)
● 2.5%.

The triple lock is in place to ensure that the spending power of any pensioner is not reduced over the years they receive it.

With the Covid-19 pandemic having a huge impact on all our lives, inflation for October was 0.5%, while average earnings in the three month period to July actually dropped by 1%. This means the state pension will rise by 2.5%.

Does the uprate apply to expats living abroad?

For any expats living abroad, whether they receive the annual uprating depends on which country they now call home.

According to the UK government, state pensions for expats will not be uprated “unless there is a legal requirement to do so, for example, where there is a relevant reciprocal social security agreement between the UK and the person’s country of residence”.

Your state pension will only increase each year if you live in:

● the European Economic Area (EEA)
● Gibraltar
● Switzerland
countries with a social security agreement in place with the UK (but you cannot get increases in Canada or New Zealand).

Which countries are impacted by the state pension freeze?

There are currently 500,000 expats in receipt of a frozen state pension with the majority (84%) living in Australia, Canada or New Zealand.

These expats will receive state pension paid at the same rate as it was when they first became entitled to receive it. Alternatively, their rate will be the same as it was on the date they left the UK if they were already pensioners then.

In some cases, expats who retired when the basic rate was £67.50 back in 2000 will still receive this sum. If they remained in the UK, then they would now receive £129.20 from the government.

What about Brexit?

The UK officially left the European Union on 31st December 2020 following many months of negotiations between the British government and the EU’s commission. The new deal came into effect on 1st January 2021.

Prior to this date and with a no-deal outcome on the cards, state pensions for all expats regardless of which country they were now living were likely to be frozen, according to newspaper reports.

However, with a last-minute deal in place, UK expats can continue to receive the uprates provided they live in a country with a reciprocal agreement in place with the UK government.

How to receive your state pension as an expat

As an expat, you can choose which bank account you receive your state pension, including an account in a foreign country.

To do this, you’ll need to provide the relevant authorities with an international bank account number and bank identification code.

This does mean you will be paid in your local currency, so your state pension sum could increase or decrease depending on the exchange rate.

State pension expat tax

Expats often have to pay tax on their state pension, but how much depends on the country they are in.

You may have to pay UK tax on your state pension if you live abroad but are classed as a UK resident for tax purposes.

As an expat, you may be taxed on your state pension by the UK government as well as by the tax authorities in your new home country. However, if this happens then you may be able to claim some of this back as tax relief.

The future of state pensions as an expat

If you’re living in a country where you cannot access the uprate, then the question is whether the situation surrounding this pension freeze likely to change in the future?

The issue is certainly a controversial one with a cross-party group of MPs lobbying the government to make a change for the 500,000 expats impacted.

In response to recent questions, the government said: “The government has no plans to change the policy on uprating UK State Pensions overseas; the policy is longstanding and has been supported by successive governments for over 70 years.”

“The government continues to believe that priority should be given to those living in Great Britain when it comes to expenditure on pensioner benefits. As such, the government has no plans to alter its policy regarding the payment of the UK state pension overseas.”

With the freeze unlikely to be changed any time soon, then it makes sense to pay as much as you can into a private or workplace pension or even an alternative savings vehicle if you are affected. The state pension should be viewed as supplementary rather than sole income when preparing for your retirement. This way, you should be able to set enough aside to enjoy a great quality of life and beat the freeze.

Next steps

Choosing the best ways to invest your money to effectively prepare for the future can be a challenge. However, ExpatRoute is on hand to help provide you with the information you need to invest effectively in your future regardless of the pension freeze.

For more information on the UK state pension freeze and how it affects expats, contact a financial adviser.

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