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  • Writer's pictureSammi Sidahmed

A brief summary of the UK pension system as an expat

The UK pension system has traditionally ranked highly in the world. However, a recent Melbourne Mercer Global Pensions Index saw the UK drop to 15th place; just a few years ago, it had comfortably been in the top 10.

However, much of this change comes from recent reforms; the new UK pension rules since April 2016 include automatic enrolment for workplace pension schemes. There’s also been a gradual increase in the legal UK pension age for both men and women.

The new UK state pension provides sufficient income in retirement and ensures a decent quality of life for those planning a UK retirement. You should also consider if UK inheritance law and taxes apply to your assets and pension savings.

Pension age in the UK

As of October 2020, the state pension age is 65. This is due to rise to 67 by October 2028.

The legal pension age in the UK is undergoing changes to steadily bring women’s retirement age in line with men. Originally for men born before 6 April 1945 and women born before the 6 April 1950, the pension age was 65 and 60 respectively. The State pension age will rise to 68 between 2037 and 2039.

A default pension age (forced retirement) no longer exists, meaning you can work as long as you like. If you decide to continue working past the state pension age, you can defer your state pension payments. Doing this increases your pension entitlement.

In the UK, you must apply to claim your pension; to defer, just don’t submit a pension application.

You can find your UK pension age using the government’s pension calculator, or see a list of pension ages for the upcoming years. Read about the new pension conditions for more information.

If you have a workplace pension or a private pension, you may be able to access the funds at a younger age than the state pension. Some allow you to take out money saved at age 55.

What happens if you are not eligible for a full pension?

To receive the full pension, pension rules require a qualifying period of 35 years of contributions; if your contributions are less than this, you’ll receive a pro-rata pension amount calculated on the pension contributions you made (as long as this is more than 10 years).

For those who haven’t lived and worked in the UK continuously, pension eligibility doesn’t require 10 consecutive years. If you move abroad and return to the UK, you can still draw a pension after 10 non-consecutive years.

If you have any gaps in your NICs in the past six years, you may be able to purchase voluntary class 3 contributions to fill those gaps up. After doing so, you can claim more from your state pension.

Supplementary pensions in the UK

Workplace pensions

The second pillar of the UK pension system consists of occupational, company or workplace pension schemes. The providers of these schemes will depend on the company your employer has decided to invest with.

Workplace pensions are now compulsory for all employers, and employees will be automatically enrolled. As of 2019, employees will automatically pay in 8% of their monthly salary into their workplace pension. You, as the employee, can opt to pay more or less. You can also opt out of the workplace pension altogether if you wish.

Employers will make contributions, too – which vary depending on the scheme available. Pension plans can be in the form of:

  • defined benefit (DB) schemes, which promise employees a fixed pension amount on retirement;

  • defined contribution (DC) schemes, which provide employees a sum of money to buy a pension on retirement, such as annuity that offers a guaranteed income for life.

The latter is deployed by most companies in the UK because it offers more tax benefits, as you make the contributions out of your gross income before tax is paid.

Private pensions and providers

The third pillar of the UK pension system is made up of private pensions, which can be taken out with your choice of pension provider, or at most British banks.

Private pensions are designed to be additional sources for retirement income and can be used to supply a guaranteed or regular income throughout retirement, or taken as a lump sum withdrawal, which is 25% tax-free in the UK.

UK private pensions require individuals to make contributions, whether monthly or via a lump sum, and can offer various tax benefits, and sometimes incorporate employer’s contributions, too.

There are two main types of private UK pension funds:

  • insured personal pension plans

  • self-invested personal pension plans (SIPPs)

The former has a limited number of pension fund options, although most modern schemes still offer a great deal of choice; whereas the latter gives more freedom to choose what investments are made and when they are sold, which can give better returns from your pension fund.

If you would like assistance in looking at your state pension or finding out more about your UK workplace pension, then please get in touch for a complimentary review.

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