Keeping the sun shining on your pension

Whether you have already emigrated or are planning to do so, you will need to be as clear as possible about how to handle your pensions and other finances if you plan to retire abroad.

Many people do so partly because they think the cost of living will be lower than in the UK, but inflation occurs anywhere and you cannot live on sunshine alone.

A good starting point is to consult an IFA before you start planning a move abroad. If you have already done so, look for a UK-based IFA who specialises in expatriate pension planning.

Before talking to them, ask HM Revenue & Customs for a UK state pension forecast, and check your benefit statements from occupational or personal pension schemes.

These should give you an idea of how much income you will get - but remember that any forecasts are based on certain assumptions such as the average inflation rate between now and your retirement date.

Under rules that come into effect this month, anyone can become or remain a member of a UK-approved pension scheme, regardless of nationality and UK tax treatment, for as long as the scheme's rules allow.

However, you will only get tax relief on your contributions if you are liable to pay tax in Britain and are either tax resident in the UK or were resident in the UK in one of the previous five tax years, and joined the pension scheme while you were resident.

If you qualify, tax relief is available on contributions up to the annual pensions allowance limit of £3,600 in 2006/7.

But after five years, you will no longer get tax relief on your pension payments, so it is unlikely that keeping your UK pension will be your most tax-efficient option. You may want to start an overseas pension at that point.

If you are still of working age, one issue to ask your advisers about is whether to continue paying voluntary National Insurance contributions in order to receive the full UK state pension.

You can claim the UK state pension as normal in any other EEA country, or a country with a reciprocal agreement with the UK, and will get the same pension as you would if you had stayed in the UK.

Elsewhere, in Commonwealth countries such as Australia, Canada and New Zealand, you can still receive your state pension but will not qualify for annual rises.

Annette Carson, a British expat pensioner in South Africa, disputed this policy through the UK courts but had her claim rejected by the House of Lords last year.

The European Court of Human Rights in Strasbourg is examining a similar case brought by 13 pensioners and sponsored by a consortium of expatriate British pensioner organisations.

The cost of unfreezing UK pensions overseas has been estimated at £400 million a year.

Few other state benefits can be paid outside the UK, but war disablement pension and industrial injuries disablement benefit, and their widows' benefits, can be paid everywhere and are increased annually.

Other disability benefits and means-tested benefits are not paid, so if you get pension credit or council tax benefit, they will end.

The winter fuel payment can be paid in the EU and in a few other countries if you qualified and first claimed it in the UK.

If you have a personal or occupational pension, you should check the details of the scheme before you move.

Living abroad should not affect payments when you retire. Your pension should be paid in full and you are normally entitled to any rises regardless of the country you retire to.

Some schemes will only pay into a UK bank and your annuity company may charge you extra to transfer money overseas.

You remain liable to pay tax in Britain on your UK pension income, as well as the country you live in.

With the state pension and most personal and occupational pensions, it is possible - if the UK has a double taxation treaty with your new country of residence - to have them paid gross of UK tax. If there is no such treaty, you may be taxed under both jurisdictions.

An issue you will face when you receive your pension income is currency risk. It will be paid in sterling and because exchange rates fluctuate, your income will vary from month to month.

Some providers are willing to pay in local currency, and those willing to pay in euros are expected to increase. This may be one criterion on which to choose an annuity provider if you exercise your "open market option" when the time comes.

Alternatively, your IFA may be able to help you shift other savings and investments into the local currency, for the sake of convenience and so that your nest egg is diversified in terms of currency risk.

Links
The Pension Service International Pension Centre deals with queries about UK benefits payable to overseas customers. You can contact it on +44 191 218 7777 (fax +44 191 218 7293) or write it at Tyneview Park, Newcastle Upon Tyne, NE98 1BA, United Kingdom.

To request a UK state pension forecast from overseas contact the HM Revenue and Customs Centre for Non-Residents


From the UK contact the Pension Service


Department of Work and Pensions


For information on your rights as an EU citizen living in another EU country

National Pensioners Convention


Seniors Network's ex-pat pensioners section

UK-based IFAs specialising in expatriate pensions include Siddalls and Towry Law.

Part one: An untaxing time abroad