Moving to sunnier climes is so often what draws pensioners away from the UK, in search of spending more time outdoors with a higher quality of life. However, how do people ensure that the life that awaits them matches up to the dream? So often, people fall foul of not having the right amount of income to lead the life to which they aspire. For pensioners, that is compounded by the fact that once retired, income is finite with no hope of a salary increase to make life a little easier in the future.
So, if you are thinking of moving to Spain, what are Spain’s pension rules? And how do they affect UK expats looking to move there? Here, we explore how Spain’s pension rules are affecting expats and how they may affect anyone considering moving there for their retirement. We also identify if there are any UK benefits or pensions that UK expats are entitled to, even when they have emigrated from Great Britain to Spain.
What are Spain’s pension rules?
Spanish pension rules are pretty generous in comparison to the rest of the world. It is thought that the government spends around 11.5% of its GDP on pensions, while globally the average is around 8.2% of GDP. How that works in practice is that in addition to the company and employee pensions or private pensions, there is also the Spanish State pension. While that is currently going through a lot of reform, it is still very attractive.
So how do you claim the Spanish State pension? To be eligible for the Spanish state pension, you have two options. You either have to meet criteria to be deemed low income or you have to have met a number of employment or social security contributions. That is similar to the UK. Currently, in the UK, HMRC takes National Insurance contributions from residents’ salaries. It is those contributions that later make them eligible for the state pension.
In Spain, to start qualifying for some of the state pensions, you need to have made those social security contributions for 15 years or more. Additionally, two of those years must be just before you start making withdrawals. However, to get the full pension from the State, you must have paid Spanish social security contributions for 36 years. Recent welfare reforms will mean that by 2027, Spanish residents will need to pay contributions for 37 years to receive the full pension.
How do Spain’s pension rules affect expats?
Given that many expats will not have 37 years of contributions to the Spanish pension system, what do Spain’s pension rules mean for expats there? For those moving from another EU state, it is possible to transfer insurance contributions to Spanish ones. Doing so will increase the amount you are eligible for in terms of the State pension.
In terms of private pensions, another key rule is that UK residents living in Spain will find that their pension is taxed only in Spain if they become a resident. This is thanks to the UK/Spain Double Tax treaty and means that if you move to Spain from the UK, you should only have to pay tax to one country. You will not, and should not, be taxed twice.
How have new Brexit rules affected expats and their pensions in Spain?
Those thinking about moving to Spain from the UK, now need to consider their move and their pension in light of the Brexit withdrawal agreement. As there could be tax implications amongst other impacts. For example, perhaps the most notable factor to consider when moving abroad to Spain is that it requires pensioners to have an income of at least £21,000.
Importantly, Spain has several agreements with other non-EU countries to allow the transfer of pension. For the UK, there is the Qualifying Recognized Overseas Pension Scheme (QROPS). Knowing whether your particular pension is transferable is key. Without it, you cannot make a fully informed decision as to whether retiring abroad in Spain is a suitable destination considering Spain’s pension rules. To be transferrable, schemes must meet certain criteria. Those criteria are set out by the HMRC.
For those that can be transferred, policyholders do often choose to transfer their pension to a Spanish scheme for many reasons.
Firstly, it stops you from being exposed to any currency risk. Fluctuations in foreign exchange can mean that in some months you have less than you do in others. While this can sometimes be for the better, reducing your exposure to negative movements is key. It ensures you always have the number of Euros you expect.
Secondly, at present, there are no lifetime allowance restrictions with a transfer in Spain. In comparison, the UK currently has a maximum threshold of just under £1,100,000. While that seems like a lot of money, many pension pots do exceed that, so you can benefit from better tax breaks that a QROPs provides. Plus, currently, with QROPs in Spain, you are allowed a larger lump sum before tax is payable. In the UK it is 25%. In Spain, it is currently 30%.
What UK benefits and pensions are expats entitled to?
If you are eligible for it, you can carry on receiving your UK State Pension even if you move to Spain. As other UK residents will enjoy, you will also see your UK State Pension increase each year at the same rate. However, importantly, you can also count corresponding social security contributions made in Spain to meet eligibility requirements for the UK state pension.
Plus, other benefits you are still entitled to even when you move to Spain are:
Bereavement Support Payment and other bereavement benefits
Statutory Sick Pay
Statutory Maternity Pay
Statutory Paternity Pay
industrial injuries benefits
If you are already receiving these benefits, and you were already living in Spain before the 31st December 2020, you will continue to receive any benefits you were already eligible for.
When it comes to your eligibility for a QROPs, you can do so if you have a UK pension which is either personal or private. Additionally, some company-defined contribution schemes or defined benefit schemes can be transferred. However, if your pension is already an annuity or your defined benefit scheme is already being paid, you cannot transfer it. The UK state pension is also not transferable.
The pension rules in Spain and how they affect expats – key takeaways
Given all the variables listed above on how Spain’s pensions rules can affect expats, it is often advisable to seek the help of a financial adviser. Doing so will ensure that you make the right choices for yourself. For instance, a financial adviser will ensure you receive the optimal amount from your pension. Their advice will mean you are not missing out on cash that you are owed. Or, perhaps, ensure that you are not paying more tax than you need.
Additionally, a financial adviser will be able to inform you of the benefits you are still entitled from the UK. Those benefits could well be in addition to any Spanish ones you may be eligible for. Finally, they may be able to direct you as to how best structure your assets. Or, where you should make more investments to maximise any returns from your pension. Doing so will make sure you have the most income possible for your time living in Spain as an expat under Spain’s pension rules.