Foreign Residents Forego £26,000 in State Pension Over 15-Year Period
Spurred by a Calculated Misfortune:
Grey-haired Brits, venturing off to sunnier climates or pursuing adventures abroad, often find themselves missing out on a hefty sum of their hard-earned state pension due to a little-known issue known as "frozen" payments. With more than 40% of 1.12 million pensioners living overseas experiencing this predicament, as per Department for Work and Pensions (DWP) data, it's crucial to understand the implications of such a move.
While these retirees still receive a UK state pension, only some of them enjoy the triple lock, which varies depending on their resident country. This perk ensures annual upratings to state pensions, based on earnings, inflation, or 2.5%, whichever is the highest.
For those who retired abroad to a country where the UK state pension is not increased, such as Australia, Canada, South Africa, or others, their pension remains stagnant at the initial rate. A retiree leaving absent of the triple lock 15 years ago would have lost a staggering £25,832 in state pension income, according to calculations by Interactive Investor. Over just a decade, the lost income amounts to £13,162, while someone who moved abroad merely five years ago would miss out on £7,391.
Myron Jobson, senior personal finance analyst at Interactive Investor, underscores the importance of considering this financial consequence when gearing up for a lifetime abroad. "The call of an exotic locale or the allure of family beckoning may be irresistible, but it’s vital to weigh up how such a move could affect your state pension entitlement,” warns Jobson. “If you move to a country where the UK has no uprating agreement, your state pension will be frozen at the level you first receive it, depriving you of the triple lock increases that UK pensioners enjoy annually."
The International Consortium of British Pensioners (ICBP) estimates that 453,000 pensioners do not receive annual upratings due to this predicament. After tirelessly advocating for change, the ICBP continues to press for a revision in government policy, ensuring that all British expat pensioners receive their state pensions in accordance with the triple lock.
Stay tuned as we delve into the ins and outs of frozen state pensions, the extent of financial loss for expats, and strategies to prepare if you're pondering the expatriate lifestyle.
The Invisible Line: Which countries are affected by frozen state pensions, and why?
Approximately 4% of the 12.7 million people receiving state pension payments sit in the vulnerable group affected by frozen state pensions, according to DWP data. The reason for this, some say, lies in the absence of reciprocal social security agreements between the UK and certain countries. These agreements are mostly established to prevent double social security contributions rather than to ensure the annual increases in state pensions for expats.
Countries like Australia, Canada, New Zealand, India, Pakistan, Bangladesh, many Caribbean islands, and all African countries fall into this category, not benefiting from any kind of uprating. The UK government contends that these agreements are contingent on reciprocity among countries, which, at present, does not extend to annual pension increases.
The ICBP cites a historical precedent for this issue, asserting, "The reason is due to this situation having existed for over 70 years." A petition to end "frozen pensions" has garnered over 174,000 signatures, calling attention to the financial hardships and retirement struggles these expats face.
The Financial Divide: How much money do expats lose due to their frozen state pensions?
Last year, Interactive Investor calculated that those living overseas with a frozen state pension receive an average of £3,000 a year - a significant £7,000 less, on average, than their counterparts residing in the UK. With age, the impact of the freeze escalates as the difference in income grows more substantial over time. By 2024, those in their 90s with a frozen state pension receive merely £1,896 a year, contrasted with a salary of £10,809 for a pensioner living in Britain - a difference of £8,913.
Jobson emphasizes that the policy can significantly impair UK expats' "financial comfort in later years, causing some to slip into poverty upon retirement." To illustrate the extent of the problem, the ICBP shares the story of Anne Puckridge, a 100-year-old World War Two veteran who paid her National Insurance contributions in full. Anne's pension was frozen at £72.50 per week upon her departure for Canada in 2001 to be closer to her family. Had she stayed in the UK, she would have been enjoying state pension payments worth £169.50 per week. However, many "frozen pensioners" receive significantly less than Anne: 49% receive £65 per week or less, according to the consortium.
Ready for the Journey: Preparing for a retirement abroad
If you’re considering a change of scenery for your golden years, it's essential to check if your state pension will be frozen in the country you intend to settle. DWP offers a handy list of countries where they pay an annual increase to the state pension. If you find yourself affected by the frozen pension policy, Jobson advises careful planning ahead. Seek advice from independent financial advisers to understand the implications of retiring abroad. British pensioners contemplating retirement abroad this year could potentially miss out on nearly £70,000 in state pension payments over 20 years if their entitlements are frozen when they move. To mitigate this, Jobson suggests:
- Topping up any gaps in your National Insurance record to maximize what you're entitled to.
- Consider deferring your state pension (though this won’t help with uprating in frozen countries).
- Building a robust private pension pot can provide the financial cushion you’ll need to maintain your standard of living abroad, regardless of state pension freezes. Budgeting carefully and preparing for rising living costs goes a long way in ensuring a comfortable and secure retirement overseas.
In our next instalment, we'll delve into what happens to your pension if you decide to retire abroad.
In light of the potential effects on personal finance, it's essential to consider that some countries do not benefit from annual upratings on UK state pensions, leading to frozen pensions. This predicament can result in substantial financial losses for expats, as a retiree leaving absent of the triple lock 15 years ago would have lost a staggering £25,832 in state pension income.
To ensure a comfortable and secure retirement overseas, one should be aware of the potential repercussions of frozen pensions. Seeking advice from independent financial advisers and taking steps like topping up any gaps in your National Insurance record, deferring your state pension (if applicable), and building a robust private pension pot can help mitigate the impact of frozen pensions on your personal-finance situation.
