If you’re a UK resident planning to move to Australia at some point, or you’re an Australian currently in the UK but intending to return home, it’s likely you’ve thought about your UK State Pension and how it will be paid to you.
Clients often ask us questions on this subject, so read on to discover seven of the key facts regarding what happens to your UK State Pension if you’re living outside the UK when you retire.
1. You’re entitled to it
The first important thing to confirm is that, if you have accrued a State Pension in the UK, then you’re entitled to claim it from your State Pension Age (SPA), regardless of where you’re living.
It’s likely that your SPA may have changed recently, so you should check on the government website to find out when you’re entitled to start receiving it.
2. You should check your State Pension entitlement
The current maximum annual new State Pension is £9,627.80. Following the recent announcement by chancellor, Jeremy Hunt, that the triple lock will be applied to increases in the next tax year, this amount is set to be in excess of £10,600 from April 2023.
However, the amount you receive will be dependent on your National Insurance contributions (NICs) while you were working in the UK. You need to have a minimum of 10 years NICs to have any entitlement, and to get the full State Pension you need to have 35 qualifying years on your National Insurance record.
You can see a handy projection of what you will get by going to the government website and inputting your details.
3. You’ll potentially pay tax on it, wherever you’re living
When your State Pension starts to be paid, if you still spend all, or even just part of the time in the UK, your State Pension will be subject to tax in the UK.
If you live entirely in Australia the double taxation agreement between Australia and the UK means that you’ll potentially pay tax in Australia.
4. You must claim it because it won’t be paid automatically
Regardless of where you’re living, to receive your State Pension, you need to claim it. It’s not paid automatically to eligible recipients.
- If you’re living in the UK, you can apply through the government website from two months before the date you become eligible.
- If you’re living in Australia you need to complete form IPC BR1 which can be downloaded from the UK government website.
If you’re living in Australia, your State Pension will be paid directly to your Australian bank account. Because the UK government bulk-buys currency for this purpose, you’ll get a favourable exchange rate on the Sterling to Australian dollars exchange.
5. If you’re living in Australia it won’t increase in payment
The automatic increase to the State Pension that’s applied each year under the government’s triple lock does not apply if you are living in Australia. The annual amount you receive at outset will remain fixed from the date you leave the UK, even if you’re already in receipt of it.
This means that the value of your State Pension will effectively decrease over time due to inflation, and is something you should clearly be aware of when you’re planning your retirement income strategy.
Clearly, this is a controversial issue that the Australian government has regularly raised with their UK counterparts. According to the Unbiased website, more than 230,000 British expats in Australia are affected.
6. You may be able to top it up
Having checked to see how much State Pension you’ll be entitled to, you should then consider paying extra voluntary contributions to top up this amount – assuming the amount you’re due to get is below the maximum referred to earlier in this article.
From April 2023, you can normally only pay to fill gaps in your NICs history for the last six years.
There are two key things to consider when you’re making this decision:
- The State Pension provides a guaranteed income for life
- As you’ve already read, if you’re living in Australia your pension income payments do not increase annually as they do in the UK.
You will therefore need to decide if topping up is worthwhile, bearing in mind that the amount you receive will not increase.
We would strongly recommend that you get expert financial advice before deciding whether to top up your pension.
7. You can defer it if you want
Because of the issue around the lack of any annual increase, you might decide to defer taking your UK State Pension until such a time as you need it – especially if you have other sources of income or you are still working. Don’t forget, that it will be subject to automatic increases until such a time as you start to claim it.
You can defer your State Pension for as long as you want. For every nine weeks you defer taking it, it increases by 1%. So, if you defer it for a year, it will increase by just under 5.8%.
However, don’t forget you will be giving up income each year. You will need to be claiming the State Pension for a few years before you earn back what you’ve given up by deferring.
Your decision as to whether to defer or not should form part of your wider financial plan. We would recommend that you speak to your financial adviser about this.
Get in touch
If you have any queries regarding your UK State Pension or about your retirement arrangements more broadly, then please get in touch with us.
The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC legislation, which is subject to change.