Many people will tell you that they would eventually like to retire abroad. The lure of sea, sand and sangria is a powerful one but what happens to your pension?
If you are working abroad
The rules are fairly straightforward for people working abroad.
If you take out a personal or stakeholder pension while a resident of the UK, then you can leave the country and continue to contribute to that pension for another five years, in addition to the remainder of the tax year in which you started the pension.
If, while working abroad, you spend on average fewer than 91 days a year in the UK, you will be classed as “non-resident” and not “ordinarily resident”. After five years, if you are a non-resident, you must stop paying into the pension.
At which point, you can:
Start a new pension in your new country of residence and transfer the UK fund into it.
Leave the UK fund where it is and draw on it at retirement.
Return to the UK, re-establish residency and go off again for another five years.
Changes to the rules
The Inland Revenue is proposing to do away with the five-year limit and allow unlimited contributions, but remove the tax relief for non-residents, although it is not clear when these changes will come into being.
If you are retiring abroad
Occupational pension schemes
Almost all pension schemes will want to pay your pension into a UK bank account. It is then up to you to transfer the money into your local (non-UK) bank – subject to whatever transfer fees may be charged for doing so.
Similar rules apply in respect of personal pensions.
In essence, you can continue to receive a UK pension, either sent to you by means of a
cheque, paid into a chosen non-UK bank account or paid to a designated agent on your behalf.
In terms of inflation-proofing your state pension, the situation becomes more complicated.
There are different rules depending on the country you move to, with European Union
(EU) and European Economic Area (EEA) countries ones being the most
favourable. There are also “reciprocal arrangements” with some non-EEA countries.
If you are going to an EEA country you will continue to receive a UK pension, which is up-rated in line with inflation.
Depending on which country you settle in after retirement, you may come under more favourable EU social security rules, which can – in some cases – pay more generous pensions based on the National Insurance contributions you have made in the UK.
Here, it is important to check in each country what you might be entitled to receive and make a decision accordingly. It is important to note that there is now a degree of co-ordination between all EU countries, which makes it extremely unlikely that you would get away with receiving two pensions.
The UK has reciprocal social security agreements with other countries that may help you to be paid benefits abroad.
Tax position for non-residents of the UK
You are liable to UK tax on your UK pension, and your pension may also be subject to tax in the country in which you live.
The same applies if your former employer has purchased an annuity for you from an insurance company, rather than paying you a pension out of a pension scheme.
You will not, however, be liable to UK tax on your UK pension if you live in a country that has a “double taxation agreement” with the UK, which exempts UK pensions from UK tax.
Where that is the case, and you make a claim for relief, the Inland Revenue will authorise payment of your pension without deduction of tax.
If there is no relief available to you under a double taxation agreement, you may be able to claim personal allowances.
Tax will normally be deducted from your pension before it is paid to you - whether it is paid by your former UK employer or by an insurance company. You may be liable to further UK tax if you are liable to tax at the higher rate.
If you were not resident in the UK when you were an employee, your pension from that employment may not be liable to UK tax in certain circumstances.
If you are considering working, living or retiring abroad and would like to review your financial position – please e-mail or contact us to arrange a meeting.
Levels and bases of, and reliefs from, taxation are subject to change.