Our comprehensive guide to the UK pension system explains how pensions in the UK work for ex-pats, including UK state pension rates to help you figure out how much you'll earn, your pension age, and how much you'll need to contribute to qualifying.
If you live and work in the United Kingdom, understanding how pensions work might help you plan a comfortable retirement.
The UK pension system has long been regarded as one of the best in the world. However, according to the most current Melbourne Mercer Global Pensions Index, the UK has dropped to 15th rank, down from first place just a few years ago.
However, much of this change is the result of recent reforms; the new UK pension laws, which went into effect in April 2016, include automatic enrolment for employer pension systems. The legal UK pension age for both men and women has also gradually increased.
The new UK state pension offers sufficient income in retirement and assures a fair standard of living for individuals considering retiring in the UK. Consider whether UK inheritance law and taxes apply to your assets and pension funds.
The UK pension system
The UK government operates a state pension system in which persons who have worked in the UK and paid National Insurance (NI) contributions - a tax paid on wages - get annual payments to fund their retirement.
When you reach the state pension age, you can begin claiming it. This age has been gradually growing in recent years and is expected to continue. When you are considered to have reached state pension age is determined by your birth date.
Individuals can boost their retirement income via company pensions and private pension investments.
The former sort of pension is often set up by your company through automatic enrollment. Since 2017, all employers have been required to participate in automatic enrolment. Employees could previously select into workplace pension systems, but now they will have the option to opt-out.
Anyone working in the UK and paying National Insurance Contributions (NICs) has this choice. Foreign nationals who do not intend to retire in the UK may be subject to different pension laws.
Who is eligible for pensions in the UK?
To be eligible for a UK pension, you must be a UK resident and hold a UK National Insurance Number.
The NI number is granted to UK citizens just before their 16th birthday. Foreign nationals entering the UK must apply for one. Residents must pay NICs for at least ten years in addition to possessing a valid NI number.
You should be aware that NICs are only deducted from your pay if you earn more than a particular amount; the current level is £116 per week. If you have a modest income, you may be eligible to make voluntary National Insurance contributions to ensure your eligibility.
It is also possible to obtain National Insurance credits instead of making contributions. If you are claiming benefits such as Jobseeker's Allowance, Child Benefit, or Maternity Allowance, you will receive these.
Pension age in the UK
The state pension age is 65 as of November 2018. This figure is expected to grow to 66 in October 2020 and 67 in 2028.
The legal pension age in the United Kingdom is gradually being raised to put women's retirement age in line with men's. Originally, the pension age for men born before April 6, 1945, and women born before April 6, 1950, was 65 and 60, respectively.
Between 2037 and 2039, the state pension age will be raised to 68.
There is no longer a preset pension age (forced retirement), so you can work as long as you like. You can defer your state pension benefits if you continue to work after reaching the state pension age. This raises your pension eligibility.
You can use the government's pension calculator to determine your UK pension age, or you can view a list of pension ages for the following years. For additional details, contact PKPI.uk for further advice
If you have a workplace or private pension, you may be allowed to access the money when you are younger than the statutory pension age. Some allow you to withdraw money saved after the age of 55. This varies depending on your provider.
What happens if you are not eligible for a full pension?
Pension rules demand a qualifying period of 35 years of contributions to get the entire pension; if your contributions are fewer than this, you will receive a pro-rata pension amount depending on the pension contributions you made (as long as this is more than 10 years).
Pension eligibility does not require 10 consecutive years for persons who have not lived and worked in the UK continuously. If you relocate abroad and then return to the UK, you can still take a pension after 10 years.
If you have any NIC gaps in the last six years, you may be able to fill them with voluntary class 3 contributions. You will then be able to claim more from your state pension.
Pensions in the UK for expats
If you are a foreign national living and working in the United Kingdom, you should be aware of your pension entitlement.
If you meet the qualifying term for contributions as an ex-pat, you should be entitled to claim a pension when you reach retirement age.
You can also enroll in occupational pension schemes (if you are not already enrolled in automatic enrolment) and private pension schemes.
QROPS: transfer and consolidate your UK pension
Expats from the United Kingdom who relocate overseas may be able to transfer their pensions to a Qualified Recognized Overseas Pension Scheme (QROPS). QROPS enables expats to combine their pensions into a single plan. This makes it easier for them to manage their retirement assets and prevent currency swings.
QROPS provides numerous advantages. They are, however, not suitable or available to all UK pensioners; seek the advice of an expert financial consultant, such as AES.
If you retire outside of the UK
If you retire someplace other than the UK, you may face different restrictions and taxes.
Tax rates are determined by bilateral agreements between the United Kingdom and other countries. This may necessitate paying taxes in both nations in some situations.
In this instance, you have two possibilities for your combined pension pot. On the one hand, you can keep your pension plan in the UK while withdrawing it from elsewhere. You can also shift your combined pensions abroad, or a mix of the two. However, you should obtain professional guidance because the tax implications could diminish your pension benefit.
Residents of EU and EEA member nations can combine state pensions from other members. This entitles you to a public pension in each country where you meet the requirements.
To do so, you must apply to the pension office in the nation where you last worked, and they will share information with other relevant EU members to determine your pension allowance for each country. See how this works for more information.
However, it is unclear whether or how the terms of this agreement would change when the UK exits the EU.
Similarly, the United Kingdom has agreements with Barbados, Bermuda, Canada, Chile, Guernsey, Israel, Jamaica, Jersey, Mauritius, New Zealand, the Philippines, and the United States.
This means that people of these nations who live in the UK can benefit from both countries' state pensions. However, it is determined on a pro-rata basis based only on the number of years you worked in each country (hence, typically a lower rate).
Pension rates and contributions
Those eligible for a full state pension can expect to receive around £168.60 per week, or £8767.20, in the 2019/20 tax year. Each year, the rate rises.
This is for those reaching state pension age on or after 6 April 2016. It applies to men born on or after 6 April 1951 and women born on or after 6 April 1953.
Single-tier “full level” pension is £185.15 a week for 2022/23
You need 35 years of NI contributions to get this full amount
You need at least ten qualifying years on your NI record to get anything.
The final UK pension rate is determined by your National Insurance record. If you haven't contributed for 35 years, you may receive less than this.
To determine your pension rate, your total pension contributions are multiplied by a variety of criteria. To ensure that there are no gaps in their National Insurance records, low-income workers or those on National Insurance Credits have their National Insurance paid for by the government.
You can calculate your UK pension rate and learn how to enhance it. The UK government also provides a pension calculator to help you determine your UK pension rate.
The new UK pension operates under a triple-lock system. This means that each year, it increases by whichever is higher:
earnings – based on the average percentage growth in wages
prices – based on the percentage of price growth, or the Consumer Prices Index (CPI), measured in the September of each year
If you choose to work past the state pension age, your pension rate increases by 1% for every five weeks you work past the state pension age, up to 10.4% for each full year. If you defer the whole state pension for a year, your payments will increase by £142.64 per week in 2019/20.
The supplementary pension rate is paid in addition to your standard pension amount.
Furthermore, if you continue to work after reaching the pension age, you will not normally be required to pay National Insurance. This does not apply to self-employed individuals who are eligible for Class 4.
If your total income exceeds your tax-free allowances, you must still pay income tax (the amount of income you can have before paying tax). This is £12,500 per year in 2019/20.
Supplementary pensions in the UK
The occupational, corporate, or workplace pension systems form the second pillar of the UK pension system. The providers of these programs will be determined by the company in which your employer has agreed to invest.
Employees will be automatically enrolled in workplace pensions, which are now mandatory for all businesses. Employees will be required to contribute 8% of their monthly wage to their workplace pension beginning in 2019. You, as the employee, have the option of paying more or less. If you like, you can even opt out of the workplace pension entirely.
Employers will also make contributions, which may vary according on the arrangement. Pension plans can take the following forms:
Defined benefit (DB) schemes promise employees a fixed pension amount at retirement; defined contribution (DC) schemes provide employees with a lump sum to purchase a pension upon retirement, such as an annuity that provides a guaranteed income for life.
The latter is used by the majority of businesses in the UK since it provides larger tax benefits because contributions are made from gross income before tax is deducted.
Private pensions and providers
The third pillar of the UK pension system is private pensions, which can be obtained from your preferred pension provider or from most British banks.
Private pensions are intended to supplement retirement income and can be used to provide a fixed or regular income during retirement, or as a lump sum distribution that is 25% tax-free in the UK.
Individual contributions to UK private pensions are required, whether monthly or in one lump sum, and can provide various tax benefits, as well as integrate employer contributions.
There are two main types of private UK pension funds:
insured personal pension plans
self-invested personal pension plans (SIPPs)
The former has a restricted number of pension fund alternatives, though most current schemes still offer a wide range of options; whereas the latter allows you to choose what investments to make and when to sell them, which can result in higher returns from your pension fund.
Other pensions in the UK
A lifetime Isa is another way to save for retirement in the UK.
Its government-backed savings account for anyone aged 18-39 who lives and works in the UK. You can deposit up to £4,000 per tax year, and anything you deposit is matched with a 25% bonus from the UK government.
Bonuses are paid monthly, but if you're saving for retirement, you won't be able to access the funds until you're 60 years old. If you withdraw money before this period, you will be charged a 25% withdrawal penalty.
You can only contribute to the account until you reach the age of 50.
Applying for your UK pension
It is always a good idea to consult with a financial advisor or your local pension office. As an expat, it is prudent to obtain guidance or visit an international advisor in all countries where you have participated in pension plans to ensure you optimize your pension income and avoid excessive tax penalties.
All citizens must initiate procedures with their local pension service to obtain their state pension, as the pension is not granted automatically.
There are several ways to obtain your UK pension. These are extensively detailed on the UK government website, or you can seek guidance from the UK pension service.
You should receive a letter from the UK pension authorities three to four months before you reach the UK pension age. If you live outside the UK, you must keep them up to date with your personal information or contact them directly when you reach the UK state pension age.
You can also apply for the state pension online within four months of reaching the UK pension age.
If you have a UK employment pension or a private pension plan, you should contact your pension provider as soon as possible to ensure you begin receiving income when you reach retirement age.
Pensions advice in the UK
PKPI.Uk offers UK pension advice to people about their state, corporate, and personal UK pensions, as well as assistance to those who are having difficulties with their occupational or private pension plan.
Visit our website for UK pension advice, call 01753527069, or book a free appointment at www.Pkpi.uk to discuss your UK pension choices over the phone or in person.