Non Resident Pension Simplified

In this non resident pension guide we give you the information you need to know to deal with your financial future.

Before we get to the meat, it is worth just going over how UK pensions work because some of this is relevant. That’s because it is possible to keep a UK pension when you move overseas. Whether or not you’d want to do this will depend on individual circumstances which we’ll come to later.

How UK pensions work

If you don’t know how UK pensions work, don’t worry you aren’t alone. Yes we’ve all heard about them, and most of us have at least one, but not many of us can claim to fully understand how they work.

The fact there’s a whole industry out there that makes money out of selling complex pension products probably doesn’t help.

At a basic level, you can think of pensions a little bit like a piggy bank. You put money in until it’s full and then you spend it.

Typically, you add new money throughout your working life and then begin withdrawing once you are retired.

It’s just like saving really, but with two big bonuses: compound interest and tax relief.

The money isn’t just left in a savings account, it is invested in one or more investment assets (usually a fund of stocks and bonds) to take advantage of compound interest so that it grows quicker than it would do otherwise.

Historically, UK and US stocks have returned about 10%. Even though interest rates have gone up a little recently you’ll be struggling to get anywhere near that in a bank account.

In addition, your hard earned cash is tax sheltered so that more of the growth can be realised and then reinvested.

There are three main types of pension: The state pension, workplace pensions and personal pensions.

What is the state pension?

The state pension is provided by the government. You build up ‘qualifying years’ by making National Insurance (NI) contributions out of your income. For most people this is an automated process handled by the government and your employer.

When you reach a certain age you can begin receiving your state pension. Right now it’s 65, but this will increase in the future. If you were eligible for the maximum state pension today, you’d receive £168.60 per week.

What is a workplace pension?

Nowadays, employers are required to enrol all employees onto a pension scheme. You can opt out if you so desire, but if you did you’d be missing out.

That’s because the contributions don’t just come from you. Your employer and the government (through tax relief) both contribute towards the scheme meaning if you opt out you’d effectively miss out on free money.

Defined contribution vs defined benefit pensions

There are two categories of workplace pensions: Defined contribution and defined benefit.

Defined contribution (aka money purchase) means the amount of money you receive is based on how much money was paid in.

Defined benefit (aka final salary) means the amount of money you receive is usually based on how long you’ve worked for your employer or how much you earned as an employee or both.

Defined benefit are much rarer these days and tend to be limited to public sector jobs.

What is a personal pension?

Personal pensions are for people who either don’t have a workplace pension (because they are self employed for example), or for those lucky enough to have enough money to want an additional pension or additional tax sheltered savings and investments.

Similar to a defined contribution pension, but without any employer contributions. Perhaps, the biggest difference and benefit is that you can choose what assets you invest in.

It’s possible to have property in a personal pension for example.

When can I access my pension?

Right now you can begin withdrawing from a state pension when you are 65, although this number will increase in the future.

You can usually start withdrawing workplace and personal pensions at 55. Most experts would recommend waiting until you are at least 60 years old before you begin, though.

How much will I get?

The average weekly income of pensioners is £246 or £511 for a couple.

That equates to just over £13K a year or £26.5K for a couple. The fact these numbers are post tax and housing costs probably explains why couples have a little more money to spend.

Overheads tend to be much lower when two people share a house.

Interestingly, when you take into consideration mortgage payments you find these kinds of amounts are very similar to people who work.

Though workers earn more, they pay higher housing costs. Once these are subtracted the numbers start to look almost identical.

How much do you need to live on?

Of course, these numbers are averages. They don’t guarantee you’ll be living in the manner to which you have become accustomed!

Luckily the Pensions and Lifetime Savings Association has come up with three sizes of retirement living standards to aim for.

3 sizes of retirement living standards

If you intend to retire in London you probably need to be increasing these figures somewhere between 20 and 50% depending on how centrally you intend to locate.

And tax needs taking into account, but if you are eligible for the personal allowance (most will be), tax only really alters the figures substantially for those in the comfortable retirement range, where to get £34k after tax you’ll be looking at around 40k before, and to get £50k after tax as a couple you’ll be looking at around £55K before.

It’s worth pointing out here that your non resident pension might not need to provide as much. It will depend where you retire and this is a topic we’ll be coming to a little later.

Do you pay tax on pension income?

You pay tax on pension income. However, if you are eligible for the personal allowance (most will be). You only pay tax above this value.

Income taxes for England, Wales and Northern Ireland are shown in the table below.

Band	Taxable income	Rate of income  taxes uk %
Personal allowance	Up to £12,570	0
Basic rate	£12,571 to £50,270	20
Higher rate	£50,271 to £150,000	40
Additional rate	over £150,000	45

That said, if you have a defined contribution pension you can take 25% of your pension free of income tax. You can either take a quarter of your pension pot in a lump sum totally tax free or you can break it down into a series of 25% tax free smaller chunks.

Who are the main pensions providers in the UK?

The main pension providers in the UK are likely to be companies you’ve never heard of like Capita Employee Benefits Limited, Veritas Asset Management LLP and Man group UK Limited to name but a few.

However, if you are after a personal pension you will find more luck elsewhere. Typically, the big UK investment platforms are your best bet for finding a personal pension.

Now, that said, non of them provide a dedicated non resident pension unfortunately. We’ll be coming to who does shortly.

If you already have assets with a UK provider and then move abroad some may let you keep your nest egg with them, but many don’t let you add fresh money, and on the off chance yours does, they are only likely to provide tax relief in very limited circumstances.

Now, that doesn’t mean you can’t put a pension together as an expat. You absolutely can and its worth going into this in a bit more detail.

What expat pension options are available?

There are three main UK pension expat options:

• SIPP
• QROPS
• DIY

We often get asked whether SIPPs are available to people living outside Britain and for the most part the answer is no. On the other hand, it maybe possible for you to keep one if you already have one before you move abroad.

In other words, Self Invested Personal Pensions (SIPPs) are for UK residents and while there maybe the odd provider that lets expats open an account, they would be unlikely to come with any tax relief over the long term, which lets face it, is the whole point. Without this you may as well take a DIY approach which we’ll be coming to later.

Is there any tax relief on pension contributions made as a non resident?

Tax relief of up to £3,600 on pension contributions for non UK residents for the first 5 years after moving abroad are possible, but depend on your eligibility.

To be eligible for tax relief, you must have been a relevant UK individual for the tax year in question. You will be classed as a UK relevant individual if:

• you have relevant UK earnings chargeable to UK Income Tax for that tax year
• you’re resident in the UK, or
• you were resident in the UK in one of the previous five tax years and, at the time you were resident ,you became a member of a UK registered pension scheme, or
• you’re a Crown Servant – or a spouse/civil partner of a Crown Servant – and have earnings subject to UK tax.

Your pension provider should be able to offer advice about this but if not it may make sense to seek out some professional assistance.

Alternatively, there’s always the option of transferring to a Qualified Recognised Overseas Pension Scheme (QROPS).

What is a QROPS?

A QROPS is a relatively common type of UK pension for non residents.

Basically, a QROPS is a dedicated non resident pension that began life as a UK pension. Not something you can start from scratch as an expat, but rather, it is a pension that is transferred from the UK to an overseas pension scheme.

In other words an existing UK pension can be converted to one of these.

As with anything in life there are advantages and disadvantages.

Essentially, a QROPS is similar to a SIPP but based outside the UK.

Though a QROPS is recognized by the HMRC, qualification isn’t as difficult as it could be.

It is a self certification process so HMRC aren’t really involved. As a result, you’d expect a mixed bag of companies out there. Some of them good, some not so much and unfortunately some bordering on criminal.

This means you absolutely must do your own due diligence and speak to a good financial advisor if you are considering a QROPS (See Where can I get UK Pension advice below).

I hate to say it but expats, especially those with British passports can quite easily find themselves coming up against unscrupulous practices. Here are three articles worth reading if you aren’t aware of this.

• Exposed – the Rip-off investment advisers who cost British expats billions
• Firm targeting nest eggs of UK expats said to face SEC probe
• FCA issues fresh warning on free pension advice

What are the advantages of QROPS?

That said, there are some benefits with QROPS. Like the ability to take up to 30% of your fund in a lump sum, receiving your pension in the currency of your choice, and depending on where you live and where the jurisdiction of your QROPS lies, the growth of the fund can be tax free.

Another big benefit of a QROPS is related to the lifetime allowance (LTA). In the UK your tax sheltered pension is generally limited to £1,030,000 at the time of writing, although there are some exceptions.

Usually, amounts above that limit will be taxed up to a whopping 55%. If you’re a multimillionaire that kind of tax is worth avoiding!

If you transfer your pension to a QROPS you are assessed when you move the money. Whether or not you surpass the LTA is assessed only at the point at which you transfer. This means you don’t pay any LTA tax at transfer if is less than the LTA and then once in a QROPS, it is not tested again.

Unfortunately, this advantage isn’t quite as good as it used to be as there is now an additional 25% tax upon transfer, although there are some situations where you aren’t liable for this tax.

If you and your QROPS are in the same jurisdiction, or your employer is a multinational who participates in the scheme you may not pay the tax.

If you fall into one of these categories and you have a sizeable nest egg, a QROPS may just make sense. This will depend on where you reside and the jurisdiction of the QROPS in question. Just make sure you employ the services of a good financial adviser (see Where can I get UK pension advice below). Not doing so, could cost you a lot.

If you have a SIPP or other UK pension, don’t have a pension pot near £1 million, and are likely to be liable for the 25% transfer tax, you are probably better off just sticking with your existing pension.

What happens if you don’t have a pension in the UK?

For those who don’t have a pension in the UK, it is usually worth considering a DIY investing approach.

As already covered above, a pension is usually just money invested in stocks and bonds with some tax relief.

As an expat you might find you don’t need that tax relief anyway. It depends where you are located. Many countries overseas governments tax their residents at much lower rates than those levied in the UK, and in some countries you may find you don’t pay tax at all. Not on worldwide income and gains from investment accounts anyway.

It maybe worth getting in touch with a professional if you are insure of how taxes work in your country (see Where can I get UK pension advice below), but even if you are liable to pay tax on investments there is an extremely tax efficient way to invest.

Quite simply the easiest way to deal with your non resident pension is to set up a brokerage account and use index tracking exchange traded funds (ETFs).

Index tracking ETFs

We’ve gone into a lot more detail about index tracking and ETFs here, but in short an index tracking ETF is a fund that holds a basket of stocks that track an index.

They are extremely tax efficient, very low cost, highly diversified and available to expats. In other words, a practically perfect vehicle for a non resident pension.

Gone are the days when you had to pay high fees to financial professionals to do things for you.

These days it couldn’t be simpler to set up. All you do is:

• Choose your expat investment platform
• Pick a couple of ETFs
• Decide upon a suitable asset allocation
• And then add fresh money whenever you have some free.

And then you are good to go for a very long time.

How long can a UK pensioner stay overseas?

A pensioner can stay overseas indefinitely and still claim their pension. There’s a couple of things worth baring in mind with the state pension though.

What happens to my state pension if I move abroad?

You can keep your state pension if you go overseas but there are some possible impacts worth being aware of.

Topping up from overseas

In most cases you can top your pension up from overseas.

If you haven’t yet recorded 35 qualifying years you may want to continue contributing.

Doing this will enable claiming the full amount when you reach the right age. And this is easy to do. Just contact the Government’s International Pensions Centre.

Are expat pension contributions in UK the same as international equivalents?

Your state pension contributions will usually be very different to what they were at home. They will typically be a lot lower.

Typically, expats pay Class 2 contributions, currently £3.15/week, although there maybe some who pay Class 3 currently £15.85/week.

I think it would be hard to argue this is a bad deal when the amount the amount you receive is £168.60 per week right now and will only increase.

In addition, If you live in the UK, your State Pension usually rises each year. But if you move overseas, you’re only entitled to an annual increase if you live in:

• Gibraltar or Switzerland
• A European Economic Area country
• A country that has a social security agreement with the UK.

The good news is you don’t usually pay UK tax if you are classed as non resident.

Are you classed as a non UK resident for tax purposes?

Although, it can quickly get more complicated that this in certain circumstances, it is usually pretty straightforward to determine whether or not you are non resident?

Did you live in the UK for less than half a year? If so, you are usually classed as non resident.

But as this isn’t set in absolute stone you may want to have a look at the HMRC statuary resident test which you can find here if you aren’t sure.

What happens to the state pension if I change bank account?

Changing your bank account is no big deal, but you do need to contact the pension service to let them know.

You can find the contact details for this here.

How do I apply for the state pension from overseas?

You can contact the International Pension Centre for any advice related to pensions and benefits if you live abroad. This includes anything related to making a new application.

How retired living can improve if you live abroad

The UK has lots of benefits. However, there are a number of reasons why retired living in the UK may not be the best option for all.

I’m sure it goes without saying that it maybe easier to find warmer weather overseas, but another key advantage is life expenses.

We’ve talked more about that here but essentially there are many countries out there where your money can go further. A lot further!

Which countries are best for retirement when you are coming from the UK?

According to International Living Magazine the top 10 best countries for retirement are:

• Panama
• Costa Rica
• Mexico
• Portugal
• Colombia
• Ecuador
• France
• Malta
• Spain
• Uruguay

These may or may be the best countries to retire from the UK. For some people, it may be beneficial if they choose a country that has a social agreement with the UK.

Which countries have a social agreement with the UK?

According to the UK government themselves:

The UK has agreements for social security contributions and benefit entitlement with Ireland and the following countries that are outside the EU, Iceland, Lichtenstein, Norway and Switzerland:

• Barbados
• Bermuda
• Canada
• Chile
• Isle of Man
• Israel
• Jamaica
• Japan
• Jersey and Guernsey
• Mauritius
• New Zealand
• Philippines
• Republics of former Yugoslavia (the Republics of Bosnia-Herzegovina, North Macedonia, Serbia, Montenegro and Kosovo)
• South Korea (also known as The Republic of Korea)
• Turkey
• USA

Chile, Japan and South Korea only cover social security contribution liability and do not include benefits. These are known as Double Contribution Conventions.

The agreement with New Zealand refers to UK domestic legislation to consider social security contributions.

Where can I get UK pension advice?

For advice about pensions, there are three places we would recommend.

Moneyhelper is a great site backed by the UK government that makes a good job of simplifying financial topics and they have plenty of advice about pensions.

If you need to speak to somebody about UK government benefits or the State Pension, the Government’s own International Pension Centre would be the best place to begin.

But bear in mind this advice is going to be restricted to topics like the State Pension and the various benefits that may or may not be available depending on your circumstances.

If you need to speak to somebody about something that the government probably won’t be much help with such as personal pensions we’d recommend starting with Unbiased. They offer a free financial advisor match-making service. In other words, they can pair you with financial advisors for free.

Essentially, Unbiased match you to advisors who are independent, regulated and qualified. And yes even though they are a UK site serving UK residents, they also offer dedicated expat financial advice. And the service couldn’t be easier to use. You key in some basic information (the 2nd question being are you a UK resident) and then they’ll get to work finding you a professional that should fulfil your requirements.

Pension related things to do before moving abroad

Contact the International Pensions Centre and make sure you continue National Insurance Contributions so that you can claim your state pension.

Contact your providers for any workplace or personal pension you have to see what happens to them when you move abroad.

Take a DIY approach. Choose an expat investment platform, choose an asset allocation and a couple of index tracking ETFs and add fresh money whenever you have some free (You can read more about this here.)

Do immigrants get a State Pension?

Immigrants can get the state pension.

You need a minimum of 10 qualifying years to receive any State Pension and 35 years to claim the maximum amount.

Qualifying years are based on your national insurance contributions. If you are eligible to work in the UK and are paying national insurance you will be building up qualifying years.

Social Security contributions you make in other countries may also count. For example, the European Economic Area (EAA) or EU countries or Switzerland can help you qualify for the UK State Pension.

Retiring to the UK from overseas

If you are a British citizen (have a British passport) you can go back to the UK whenever you want.

However, the key thing to be aware of is that it may take a few months to re-establish your rights to services such as benefits and housing.

This is particularly important if you are older and looking to organise a care home. That’s because to qualify for social care, you have to show that you’re ‘ordinarily resident.’ Not easy to do when you don’t live in the UK!

One solution is to return to the UK and live in private accommodation, care home or otherwise, to establish your ordinary residence.

Non resident pension – the bottom line

Everyone should have a non resident pension. Even if you don’t have a workplace or personal pension before you move there’s nothing to stop you contributing to your state pension and taking a DIY approach with index tracking ETFs.