Whether you’re leaving the UK to retire abroad or work in a foreign country, you might want to think about transferring your pension. Read on to learn what your options are and what you need to consider before making a decision.
What happens to your UK pension if you retire abroad
If you choose to retire abroad, the good news is that you can still receive payment from the UK state pension plan when living outside the UK.
However, your pension scheme may be subject to new regulations, making it slightly less convenient for retired expats to withdraw funds. Here are some things to consider if you’d like to retire abroad and claim your UK state pension:
- Pension credit, which gives you extra money to help with living costs, will stop entirely.
- Your pension can be paid to a UK bank account in Pounds or to an overseas account in the local currency. The latter looks more convenient but bear in mind the full amount may be impacted by unfavourable exchange rates.
- You won’t have to pay UK tax on your pension, but you might be required to pay tax in the country where you live.
If you live in the UK, your state pension will rise yearly to account for inflation. However, if you retire abroad, your pension will not increase unless you retire in:
- Gibraltar or Switzerland
- the EEA
- a country that has a social security agreement with the UK.
If you move back to the UK, your pension will be adjusted to match current rates.
If you retire abroad before your UK pension age
Your eligibility for state pension in the UK is determined by payments made to the UK National Insurance scheme and a few other factors.
You will not be able to pay towards your pension eligibility if you leave the UK before you reach your state pension age unless you immigrate to, and pay towards social security in:
- a country within the EEA
- any country that has a social security agreement with the UK.
What is a QROPS and how does it work?
A Qualifying Recognised Overseas Pension Scheme (QROPS) is a foreign pension scheme approved and monitored by the HMRC.
If you retire abroad from the UK, having your pension in a QROPS can be beneficial. Some allow you to receive your retirement income in the local currency rather than Sterling, avoiding foreign exchange fluctuations. Some QROPS charge a 25% tax fee on transfer. It is possible to apply for one that does not, but know you may lose a significant portion of your savings if you do.
Additionally, QROPS allow you to withdraw as much of your pension as you’d like. For example, you could withdraw a lump sum as a gift. Or, you might withdraw less when you’re less active during the year. However, this freedom comes with the potential risk of exhausting your funds, unlike UK annuity pensions which provide guaranteed income for life.
Transferring a private pension is an important question, and it’s recommended to consider whether you’ll benefit by transferring. Here are some things to consider before transferring your private or workplace pension to a QROPS:
- QROPS abide by regulations set by the HMRC. The most important rule states that you cannot access a QROPS pension before age 55 without incurring a 55% tax charge.
- You must live outside the UK for 10 consecutive tax years before you can withdraw a QROPS pension.
- Some QROPS may charge a fee when transferring and may charge additional recurring fees.
We recommend you seek financial advice before transferring your pension, as the related issues can be complex.
Do you have to transfer your workplace pension when you move abroad?
Workplace pensions generally come in one of two forms:
- ‘Defined contributions pensions’ are the most common. They compensate you depending on how much money you’ve contributed during your employment, such as the National Employment Savings Trust (NEST).
- ‘Defined benefits pensions’ are less common. They provide a pension based on the number of years you have worked for a company, regardless of salary.
If you have a defined contribution pension, you do not have to transfer it to a foreign pension provider. However, contributing and drawing from your pension might expose you to significant fees.
Similarly, if you have a defined benefit pension, you can leave it with your UK pension provider when moving abroad. However, if you’d like to withdraw from it, you risk losing any retirement income and any safeguarded benefits attached to the policy.
Many UK pension providers won’t let you deposit pension funds into an overseas bank account. If they do, they often charge large fees. If you have a bank account in the UK, you can draw your pension into that.
How to protect your pension income from currency volatility
If you want greater control over your UK pension funds when living abroad and don’t want to be subject to QROPS regulations, converting your UK pension into a foreign currency is a viable financial strategy. This way, you can avoid any transaction fees and unfavourable exchange rates imposed by the HMRC or QROPS when automatically exchanging UK pension funds into foreign currency.
Sign up today to access our network of regulated payment partners. Our currency concierge team will ensure you receive the most from your UK pension. We offer same-day transfers as well as better-than-bank exchange rates with no hidden fees.