Pensions

Whichever country you choose as your retirement destination, you will receive a UK basic state pension if you have paid enough national insurance contributions over the years.

As this is likely to be the foundation of your retirement income, it can be disappointing to see this frozen at the level when you leave the UK, despite increases in living costs. For this reason, you might think twice about retiring to Australia, Canada, New Zealand and South Africa. According to Age Concern, many problems experienced by UK nationals resident abroad are as a direct result of insufficient income. It is possible that inflation could erode your state pension income substantially.

Normall, the UK state pension is up-rated in line with price increases each April. However, to receive index-linked pensions you need to live in the European economic area or one of the other countries with which the UK has a social security deal - Barbados, Bermuda, Bosnia-Herzegovina, Croatia, Cyprus, Guernsey, Israel, Jamaica, Jersey, Macedonia, Malta, Mauritius, the Philippines, Sark, Slovenia, Switzerland, Turkey, the US and Yugoslavia.

A British pensioner living in South Africa, Annette Carson, has made an unsuccessful attempt to challenge the government policy under which 480,000 expatriate basic state pensions are not adjusted for inflation. In a test case in May 2002, the high court ruled against her on the grounds that the issue was political rather than legal. However, in June 2003 the court of appeal dismissed her claim that the government unlawfully discriminated against Britons living abroad.

UK state pensions are paid gross and, according to Charles Ansdell, spokesman for IFA InterAlliance, can be paid into a bank account in almost any country (you can get information from the International Pension Centre on 0191 218 7777, email typ-customer-care@dwp.gsi.gov.uk).

You need to inform your former UK local authority of your plans and give them the details of a local bank branch or post office in the town overseas where you wish to receive your money.

Private pensions

If you receive a personal pension or an occupational pension, contact your pension provider about arrangements for receiving payment abroad.

Andy Fleming, spokesman for the National Association of Pension Funds, says: "There is no problem getting your company pension if you live abroad, but most company pension funds will insist on paying it into a UK bank account in sterling. It is up to you to make arrangements for transferring this. One or two of the bigger funds might be able to pay a pension abroad or send a cheque, but it will be in sterling."

Be aware that the value of your UK pension will fluctuate with exchange rates because it is paid in sterling. Exchange rates can also work in your favour. Peter Quinton, managing director of the Annuity Bureau, points out that UK nationals who retired to South Africa 10 or 15 years ago have found their pension has gone up substantially as the rand has weakened. "In general, UK nationals are quite well protected as sterling is quite a strong currency," says Quinton.

It is possible to transfer the whole fund to a private pension scheme in the new home country, which would remove the currency risk. But transferring pensions abroad is complex and requires specialist advice.

"The only real reason for transferring abroad is if the pensions benefits offered are going to be better than in the UK, which is unlikely," says Ansdell. 'The other reason is that you don't have to buy an annuity."

However, it might be difficult to find a scheme to transfer to. In most European countries there are few private pensions schemes as most pension provision is provided through the state.

Ansdell says: "There are also doubts as to the benefit of transferring a scheme abroad. There are unlikely to be greater tax benefits and the UK private pensions industry tends to be better administered."

International transfers must be approved by the Inland Revenue. Ansdell explains: "The UK government insists on checking the overseas pension scheme you are transferring to is bona fide before allowing it. This is to stop the scam of cashing in your pension when you go for a long weekend to the Isle of Man then coming back to the UK."

Don't be conned into putting your money into an 'offshore pension' offered by many international life assurers. Ansdell says: "These are not pensions in the sense that they offer the tax benefits unique to the UK pensions system. Instead, these are merely offshore savings accounts designed for your retirement."

Tax issues

You will not be liable to UK tax on your UK pension if you live in a country which has a double taxation agreement with the UK. Under most such agreements pensions are only taxed in the country where you are resident. 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 under a double taxation agreement, tax will normally be deducted from your pension before it is paid.

Government-sponsored schemes such as the civil service pension will be subject to the UK taxation regime even if you are abroad. Jonathan Springroach, a financial adviser with Towry Law International, says: "The government scheme remains taxed in the UK. When you are filing your tax return in the new country you need to inform local tax authorities not to aggregate tax on to local tax returns. The same applies for state pensions.

"For non-government schemes, you must apply to the foreign tax office in the UK to get your pension paid gross. You will need to get a stamp from the local tax office in the new country to say you have got it registered."

Springroach also advises that if you are taking a lump sum from a UK pension, you should draw it at the time you are UK tax resident. In some countries you could end up with a tax liability.

Useful contacts

Pensions and Overseas Benefits Directorate, Tyneview Park, Whitley Road, Newcastle upon Tyne NE98 1BA. Tel 0191 203 0203
Pensions Advisory Service, 11 Belgrave Road, London SW1V 1RB.
Tel 020 7233 8080, opas.org.uk

· The above is an edited version of a feature which originally appeared in the August edition of Money Observer magazine. You can find out more about Money Observer and subscribe online at Moneyobserver.com