With globalisation creating an ever-shrinking world, travelling is becoming easier, faster, cheaper, and more comfortable.

“Going home” was always the retirement destination for most expats, but today the concept of retirement knows no borders.

For British expats, the prospect of enjoying their golden years abroad is an exciting thought – whether it’s the weather, the culture, the cost of living, or the local cuisine, there’s lots to like.

Especially when, in most cases, they are just a short flight away from the UK and frequent visits are no issue.   

However, along with the thrill of living in a new country comes the added complexity of cross-border planning and the responsibility of ensuring a secure financial future.

Pensions play an important role in your long-term financial planning. In this blog, we’ll delve into the intricacies of pension planning for UK expats, exploring the challenges they might face and offering guidance on how to navigate them.

The Foundation to Pension Planning – Understanding the UK State Pension

The UK State Pension is the foundation of retirement income for all Brits.

The good news is that you can still qualify for State Pension as an expat and you can also receive State Pension while living abroad –you’ll just have to be more proactive about it, given you no longer make National Insurance contributions automatically through a UK employer.

Your State Pension will depend on your National Insurance record, with a minimum of 10 years National Insurance contributions required to qualify for any State Pension, and 35 years required to qualify for full State Pension. It’s essential to understand your National Insurance record, keep track of your contributions, and understand how they will impact your State Pension entitlement.

It’s important to continue making voluntary National Insurance contributions while living abroad to ensure you qualify for State Pension in the future.

For more information on State Pension, see our recent article here.

Simplifying Your Pensions – Private Pensions and Occupational Schemes

Beyond State Pension, many UK expats have private pension arrangements, including workplace pension schemes that have built up from time spent working in the UK.

Often, this can be a confusing spiderweb of pension schemes built up from different jobs and roles over many years. The prospect of dealing with them can often feel like opening pandora’s box, and so people are put off doing anything about them.  

In most cases, it’s useful to bring all these legacy pensions together and consolidate them into one pension. This will improve transparency and oversight, and make your pension much easier to manage – one set of log ins, one set of clear fees and charges, ensuring the pension is invested appropriately and in line with your long term goals – everything becomes easier with just one scheme to worry about.   

The portability of these pensions depends on the type of scheme you’re enrolled in. If you have a personal pension, a self-invested personal pension (SIPP), or a defined contribution scheme, managing your pension while abroad becomes more straightforward.

However, if you’re part of a defined benefit scheme, the situation is generally more complex. These schemes guarantee a specific income in retirement based on your salary and years of service with the company.

Transferring a defined benefit pension may not always be in your best interest due to the potential loss of valuable benefits – there are very few sources of “guaranteed” income in retirement and such transfers are irreversible once done.

If you are considering such a transfer, it’s important to note that the FCA’s default starting position for any such decision is that a transfer is unsuitable, and you will need to take independent advice from a pension transfer specialist before making any such decision.

Tax Implications – Navigating International & Cross-Border Taxation

Taxation is a significant factor in pension planning for UK expats.

The tax treatment of your pension will depend on the tax laws of both the UK and your country of residence.

Over 100 countries around the world have double taxation agreements in place with the UK to prevent you from being taxed twice on the same income.

A common mistake amongst expats is to focus on the UK rules and ignore the rules of your country of residence – one example of this is in relation to PCLS (Pension Commencement Lump Sum). This is a UK rule which allows you to take 25% of your pension pot tax free – but just because this will not be taxed in the UK does not mean it won’t be taxed in your country of residence.

Most countries will have their own rules and allowances, others will cover PCLS completely in their double tax treaty with the UK, but some might not recognise PCLS at all and fully tax it.

Make sure you understand local tax laws and how they might impact you before you start to draw down from your pension.

Some UK expats choose to transfer their pensions into Qualifying Recognised Overseas Pension Schemes (QROPS) to take advantage of potentially favorable tax treatment. However, QROPS are often misused overseas and the decision to transfer should be based on careful consideration of your personal circumstances. If you are interested in reading more about the differences between a UK SIPP and an overseas QROPS, read our piece here.

Dealing with Different Currencies – Mitigating Exchange Rate Risks

For UK expats, receiving pension income in GBP while living abroad leads to additional currency risk.

Currency fluctuations can significantly impact your purchasing power, which is ultimately the most important thing when it comes to your lifestyle and how much money you have to spend.

Exchange rates can be volatile and unpredictable, potentially eroding the value of your pension income. Therefore, it’s always advisable to remove as much currency risk as possible.

To mitigate this risk, consider strategies such as currency hedging or diversifying your investments in different currencies. These strategies can help stabilise your income and safeguard against sudden currency shifts.

For example, an expat retiring in Spain or Portugal might decide to invest their pension money in EUR, removing currency risk from the equation.

Making it Last – Longevity, Inflation, and Sequencing Risk 

With advancements in healthcare, people are living longer, which means your retirement savings need to last a long time. According to the Office of National Statistics, the average male retiring today at 55 is looking at a 29-year retirement, while the average female is looking at a 32-year retirement.

When you overlay the impact of inflation onto this picture, the sustainability of your pension becomes a real focus – as prices rise and the cost of living increases, your purchasing power is eroded and you may need to spend more to maintain the same lifestyle over time.

On top of this, bringing sequencing risk into the equation can really put your pension under pressure if ignored – this is the risk created by the combination of the ‘sequence’ in which returns are generated and withdrawals are made from a portfolio:

Picture a retiree who plans on spending £100,000 per annum and withdraws this amount on the 1st of January every year in retirement, regardless of market conditions. If market conditions are poor and the portfolio is down at the time of the withdrawal, the portfolio will not recover, and the pension pot will deplete quickly. A combination of good planning (such as having a pot of 2-3 years’ worth of retirement spending on hand), or flexibility (such as withdrawing less when markets are down and more when markets are up) will help to mitigate this risk and greatly improve the sustainability of your pension over time.

Big Picture Thinking, Estate Planning & Future Generations

Finally, it’s important to remember that pension planning is just one piece of your overall financial planning.

Whilst this article focuses on pension planning, it’s likely that you will have other assets outside of your pension, so it’s important to think holistically and keep the big picture in mind when it comes to your overall financial planning and generating retirement income.

Most expats also tend to think less and less about the UK tax system as more and more time passes since they were last UK tax resident, but most UK expats will always be considered UK domicile.

This means that while UK income tax and capital gains tax may cease to be relevant for a lot of people during their period abroad, UK inheritance tax (IHT) will apply on death.

Pensions can play an important role in estate and IHT planning because they sit outside of your estate and will not be subject to IHT.

Therefore, it’s usually a good idea to preserve your pension for as long as possible, and spend from other pots of money first to reduce the value of your taxable estate. Your pension will always be there, and if you don’t get around to spending it all then you can pass it on to your children or loved ones tax-free.

Conclusion & Seeking Professional Advice

Pension planning is a critical piece to the retirement puzzle.

From understanding your State Pension entitlements to managing private pensions, navigating taxation, addressing currency risks, and sustaining your pension throughout retirement, there are various factors to consider when it comes to securing your financial future as a UK expat.

As you embark on your expat journey, remember that you don’t have to navigate these complexities alone. Seeking professional guidance from an expert financial planner can provide you with the information and strategies you need to make informed decisions, safeguard your retirement income, and fully enjoy the adventures of life as an expat.

Your golden years should be a time of relaxation and fulfilment, and proper pension planning can make that vision a reality, no matter where in the world you decide to call home.

By Technical Team @ Abacus

Please keep in mind that, whilst we aim to update these articles periodically, the content could be subject to future rule changes. Always make sure to speak to a qualified professional to ensure you have the most up to date information and are taking regulated advice around your specific circumstances.