If your dream retirement is somewhere with more sunshine and less rain than the UK, then it may be time to ask yourself “how will moving abroad affect my pension?”
The State Pension
You can claim your UK state pension if living abroad, but it will continue to be paid from the UK and in pounds sterling.
This raises questions about transfer fees and exchange rates. Both of these have the potential to eat into your hard-earned pension.
You should also note that pension increases will only be applied if you move to a qualifying country and you must also live in the UK for 6 months or more each year. At current time this is a country in the EEA, Switzerland or a country which has a specific agreement with the UK that the UK will provide these increases. If you move anywhere else, your state pension will be frozen at the rate when you moved abroad.
If you have a private-sector pension, either workplace or personal, then you have the option to pay it into a Qualifying Recognised Overseas Pension scheme (QROP schemes).
Overseas pension scheme means exactly what it says. They are special schemes for expat pensions, which are domiciled abroad and which can pay benefits in a currency other than pounds sterling.
The sticking points are the words ‘qualifying’ and ‘recognised’.
In very simple terms, QROP schemes are schemes which are recognised by HMRC in the UK.
Moving your pension to a QROP scheme means that you will pay tax at the local rate rather than at the UK rate.
It does, however, mean, that your consumer protection rights will be the rights afforded by your host country rather than by the UK.
QROP schemes can offer (significant) tax advantages to those moving to lower-tax countries. It is, however, important to ensure that any particular QROP scheme is right for you before you move your money to it.
It is also important to ensure that any scheme claiming to be QROP-compliant actually is, otherwise you could face a number of nasty surprises.
Workplace pensions – public sector (defined contributions)
If you have a defined contributions public sector pension, then it will be treated in the same way as a workplace pension from the private sector or a funded defined benefits pension.
A defined contributions scheme is one in which the employee and employer make a certain level of contributions, which are then invested to create a pension fund for the employee’s retirement. They are therefore, essentially funded schemes.
Workplace pensions – public sector (defined benefits)
Defined benefits schemes are those in which the employee is guaranteed a certain level of benefit. The responsibility for funding this benefit lies entirely with the employer. In terms of public sector pension, defined benefits schemes can be funded or unfunded. Funded defined benefits schemes are backed by assets. Unfunded schemes are paid out of government funds.
If you are a member of a funded, public-sector, defined-benefits scheme, then your pension is treated in the same way as a private-sector pension or a defined contributions public-sector pension. If, however, you have an unfunded public-sector, defined-benefits pension then new pension rules now stop you from moving your pension into a QROP scheme.
In other words you will only be able to receive your pension payments in pounds sterling and will have to deal with transfer fees and exchange rates.
While shopping around may help you to minimise the former, there is little the average person can do to influence exchange rates.
Pensions are not the only way to finance retirement
While pensions may form a key part of retirement planning, there are other ways of financing retirement and some of these may be more flexible in terms of accommodating those moving outside the UK.
There may also be options for moving assets and/or generating income in your new home country. This may help to balance the risk of changing exchange rates.