Retiring overseas tops the wish list of thousands of workers seeking a better lifestyle with a cheaper cost of living in warmer climes.
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Australia, the USA, and the suntraps of Spain, France and Portugal regularly top the rankings as the top destinations for British expats.
But did you know state pension rules apply to countries in Europe and those beyond which can make a difference to the amount of money you are paid in retirement?
Few expats understand that where they retire can greatly impact their money and lifestyle.
If you don’t know, here are six of the factors you need to consider if you retire abroad.
You may have worked hard all your life and are ready to step down into retirement, budgeting to receive a state pension – only to find out the rules have changed, and you get a lot less money than you hoped.
New state pension rules, which came into effect on January 1, 2022, determine if you can claim and, if so, how much.
The key data comes from your National Insurance record. You need at least 10 years on your file to qualify for any state pension payment and 35 years for the full amount of £185.15 a week\£9,627.80 a year from April 2022.
For expats with less than a 35 year NI record, the state pension is calculated as”
Weekly amount divided by 35 years, multiplied by Qualifying NI years
For example, if an expat in Spain has 25 qualifying NI years and is about to retire in 2022-23, their state pension payments would be:
£185.15 divided by 35, multiplied by 25 = £132.25
The new state pension rules cover expats who pick up the new state pension (starting April 6, 2016, or later) and have lived in:
- Australia before March 1, 2001
- New Zealand
From the start of this year, expats can no longer count any time lived in these countries as qualifying years towards the state pension if you are a UK, European Union, European Economic Area or Swiss living in the EU, EEA or Switzerland.
The change follows the UK leaving the EU and includes anyone claiming or waiting to start claiming their state pension. The pension needs recalculating according to an expat’s UK NI record ignoring any years spent in any of the three listed countries.
Expats living in Europe before December 31, 2021, are unaffected, and their state pension calculations remain under the old rules.
Most years, the state pension rises by any increase in the cost of living the year before.
But hundreds of thousands of expats have their state pensions pegged at the initial rate for good.
The lottery of if a pension rises in line with inflation depends on where you retire.
So who benefits from the cost of living rises? Anyone living in the European Union or European Economic Area plus a list of countries with reciprocal social security agreements with the UK qualifies.
Here’s the list of countries with social security agreements with the UK:
- Isle of Man
- Jersey and Guernsey
- North Macedonia
- New Zealand
- South Korea
Many expats pay tax on their state pensions in the UK or the country where they live.
If an expat pays tax on their state pension depends on if the country where they live has a double taxation agreement (DTA) with the UK.
The chances are you may pay tax twice on the same pension cash if the country has no taxation agreement.
For places with a DTA with the UK, tax is only paid once, according to the terms of the agreement.
If you are not well off and live in the UK, it’s possible to top-up your payment with pension credits. These are means-tested benefits that stop once you move abroad.
Offshore banking is a broad term that covers opening a bank account outside the country where you live.
You can opt to accept state pension payments as an expat in a UK bank, building society or an offshore bank. The pension is paid in Sterling and converted to the local currency if you bank offshore.
This can create problems between the pound’s value against other currencies as the rates move up and down against each other.
Most expats move abroad long before they retire and do not check out their state pension consequences before they go.
Around 5.5 million Brits live overseas, with at least half over retirement age. Of those, around 500,000 are estimated to have a frozen state pension because they live outside Europe or a country on the reciprocal social security list, according to APPG, the British All-Party Parliamentary Group campaigning to unfreeze state pensions.
If you are moving to Europe, you should receive the same state pension there as in the UK, along with the yearly cost of living increases.
Outside Europe, check your new home’s DTA and social security agreement status with the UK for early warning if you are likely to receive a frozen state pension.
Your state pension age sets the earliest date you can receive the state pension.
Check the date that you will reach that age.
How much state pension is paid depends on the number of NI qualifying years you have.
Where you live may impact the amount paid from the second year of payment onwards as your home may be in a country where no cost of living increases apply.
The state pension forecast estimates an expat’s payment based on their NI contributions.
Use this free online tool to find out how much state pension you might get
You can buy more qualifying years to increase your state pension payments once the financial year (April 6 until the following April 5) you are lacking has closed. The purchase window stays open for six years.
The figures are based on the National Insurance rates for the year in question.
However, Class 3 NI contributions for 2021-22 were £15.40 a week or £880.80 a year.
You can check your National Insurance contributions online.
This government service will tell you about any NI gaps in your record, if you can pay voluntary contributions, and how much they will cost.
You must claim the state pension – payments are not automatic.
If you miss payments but claim them within 12 months of reaching state pension age, ask that the start date is backdated to your last birthday.
If the claim is made 12 months after reaching state pension age, the state pension is treated as a deferred pension.
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