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Retiring Abroad: Don’t Get Burned by a Bad Deal

Happy mature couple sitting on the beach.

It’s the dream, isn’t it? Spending your golden years beneath the hot glow of the equatorial sun, your toes curled up in the sand, a great book at hand to capture your imagination while the rest of you is stress-free.

Retirement is financially complex at the best of times, let alone when living overseas comes into the equation. Problems arise when people plan to retire abroad without taking into consider some financial hindrances along the way, the most prolific being the issue of “frozen” pensions.

The Deep Freeze

A frozen pension occurs when a UK resident emigrates while taking out their pension to a country outside of the European Economic Area (EEA), Switzerland and countries with mutual social security agreements with the UK, most notably the US.

If a retiree moves somewhere that doesn’t meet these requirements, then their pension amount stays the same regardless of inflation rates and the increased cost of living. This obviously causes serious problems.

Feeling the Burn

UK expats living in Commonwealth countries such as Canada, South Africa and Australia are feeling the pinch of the UK’s unmoving stance on their state pension foreign policies, with some older retirees living on as little as £7 a week.

Despite around 55,000 British expats suffering from the recoil of this policy, the UK government is reluctant to change the legislation. The projected cost to “unfreeze” expat pensions is £590m, a sum the government will avoid if it can.

If you’re considering retiring abroad to enjoy “the good life,” there are a few legalities you should be made aware of in order to fully prepare you, and ensure you maximise your retirement income.

Taking a State Pension Abroad

State pensions can be claimed wherever you move to, though in some countries those pensions will be frozen. To access the full state pension of £113.10 a week, however, you’ll need to have a good thirty years of UK National Insurance contributions during your working life.

Once claimed, the state pension can be paid either into a UK account or directly into a foreign account in local currency, meaning that you can avoid transfer fees.

It is also worth noting that if you moved to your retirement destination before you took out a pension, and have established a decent work history, you may be eligible to claim a local state pension to supplement what you might have lost on your UK pension.

Taking a Private Pension

If you are planning on moving to a country outside of the EEA and the US, it’s worth building up a private pension pot to ensure that a frozen state pension doesn’t leave you poverty stricken ten years down the line.

Accessing a private pension pot is slightly more complicated than claiming a state pension. Private pensions established in the UK are paid in sterling into your UK account. To counter costly transfer fees and bank charges, you can set up an international account with the same bank; banks will often drop the fees if the funds stay within their jurisdiction.

Alternatively, you can move your pension pot abroad with a Qualifying Recognised Overseas Pensions Scheme (QROPS). Once you’ve been a non-UK resident for five years, your QROPS will be out of the UK tax net, which means you can enjoy a tax-free pension.

If you can put in the financial preparation, retiring abroad can be a wonderful ordeal. So sit back, relax, and enjoy the golden years the way you always wanted to.

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