As a financial advice firm regulated in both the UK and Australia, we run financial webinars for people in the UK thinking of emigrating to Australia, and UK expats already living there. Some of the most frequent questions they ask us concern the UK State Pension for expats in Australia.
We therefore thought it would be useful for us to cover off some of the questions we have been asked, together with what we think are some of the key facts about the UK State Pension.
1. You’re entitled to your UK State Pension, even though you’re living in Australia
If you have accrued a State Pension in the UK, then you’re entitled to claim it, regardless of where you’re living in the world, when you reach your State Pension age (SPA).
There have been changes made to the SPA recently, so you should check when you’re entitled to start receiving it.
2. The amount you’ll get will depend on your National Insurance history
At a current exchange rate of $1.75 to the pound, the full annual UK State Pension of £9,110 is worth $15,942.
However, the amount you will get is dependent on your National Insurance history while you were working in the UK. To get the full State Pension you need to have 35 qualifying years on your National Insurance record.
You can see a projection of what you will get by going to the UK government website and inputting your details.
You should note that, even though you are entitled to take your pension at SPA, you’re not obliged to do so. It may well be advantageous to defer taking it. We’ll consider the issue of deferral later in this article.
3. The UK State Pension is taxable
If you still spend part of the time in the UK, your State Pension will be taxed in the UK. If you live entirely in Australia the double taxation agreement Australia and the UK have means that you’ll be taxed in Australia.
4. Your UK State Pension will not increase each year
The automatic increase to the State Pension that’s applied each year does not apply if you are in Australia.
So, the annual amount you receive at outset will remain fixed throughout, which means that the value of your State Pension will effectively decrease over time due to inflation.
This is a controversial issue and the Australian government has regularly raised this with the UK government, asking them to end this ‘unfair’ policy. It impacts more than 200,000 UK pensioners in Australia who receive a frozen State Pension.
5. You can make additional voluntary contributions
Once you’ve checked your State Pension entitlement, you’ll have a better idea of whether you want to pay extra voluntary contributions to top up your State Pension.
You can normally only pay to fill gaps in your National Insurance history for the last six years.
There are two things to bear in mind:
- The State Pension provides a guaranteed income for life
- As we have already stated, your pension income payments do not increase annually as they do in the UK.
You will therefore need to decide whether making additional voluntary contributions is worthwhile, given that the amount of pension you will receive will not increase.
We would strongly recommend that you speak to your financial adviser before deciding whether to top up your pension.
6. You can defer taking your UK State Pension
Because of the issue around the lack of indexation, 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 are still working.
You can defer your State Pension for as long as you want. For every nine weeks you defer taking it, it increases by 1%. This means that, if you defer it for a year, it will increase by just under 5.8%.
However, you will be giving up income each year, so you will need to be claiming the State Pension for a few years before you earn back what you’ve given up by deferring.
The decision of whether to defer should be taken as part of your wider retirement income planning process rather than in isolation. We would recommend that you speak to your financial adviser about this.
7. Your UK State Pension won’t be paid automatically, you need to claim it
The Pension Service form you need to complete is IPC BR1 which can be downloaded from the UK government website.
You can have your State Pension paid directly to your Australian bank account. An advantage of this is that you will get a favourable exchange rate as the UK government bulk buys currencies, so will get them cheaper than would normally be available to consumers.
How we can help
Here at bdhSterling we have a wealth of experience in advising clients about their retirement planning – both in the UK and Australia.
We can advise you of the best way to take your UK State Pension as part of a wider financial plan to take you up to, and into, retirement. Get in touch to find out how we can help you.