Our complete guide to the UK pension system explains how pensions in the UK work for expats, including UK state pension rates to help you calculate how much you’ll get, pension age, and what contributions you’ll need to make to qualify.
If you live and work in the UK, gaining a better understanding of how pensions in the UK work can help you plan a more secure retirement in the UK
The UK pension system has traditionally ranked highly in the world, but the most 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 can be apportioned to recent reforms; the new UK pension rules since April 2016 include automatic enrolment for workplace pension schemes, and there’s also been a gradual increase in the legal UK pension age for both men and women.
The new UK state pension is designed to provide sufficient income in retirement and ensure 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.
This UK pension guide, explains
- The UK pension system
- Who is eligible for pensions in the UK?
- Pensions in the UK for expats
- UK pension rates and contributions
- Supplementary pensions in the UK
- Other pensions in the UK
- Applying for your UK pension
- Pensions advice in the UK
- Useful resources
The UK government has a state pension system, where those who have worked in the UK and contributed National Insurance (NI) payments – a tax that’s paid on your earnings – are given regular payments to fund their retirement.
You can start claiming the state pension once you reach ‘state pension age’ – this age has been gradually increasing over the past few years, and is set to continue to do so. When you’ll be deemed to have reached state pension age will depend on when you were born.
Individuals can supplement their UK pension amount with UK workplace pensions and private pension investments.
The former type of pension is typically set up via automatic enrolment by your employer. Automatic enrolment has been compulsory for all employers since 2017. Previously, employees could opt in to UK workplace pension schemes, but now they will have the choice to opt out instead.
This option is available to anyone working and paying National Insurance Contributions (NICs) in the UK, but different UK pension rules may apply to foreign nationals who aren’t intending to retire in the UK.
To first qualify for a UK pension you must live and work in the UK, and have a UK National Insurance Number
For UK citizens, their NI number is issued shortly before their 16th birthday, but foreign nationals will need to apply for one on entering the UK. Read more about obtaining an NI number
In addition to having a valid NI number, residents living and working in the UK must also pay NICs for at least 10 years in order to qualify for the basic state pension.
Be aware that you will only have NICs taken out of your pay if you earn over a certain threshold – currently, that’s £116 per week. If you’re on a low income, you may be able to make voluntary NI contributions to ensure you get the state pension.
It’s also possible to get National Insurance credits to act in place of making contributions. You’ll get these if you’re claiming benefits such as Jobseeker’s Allowance and child benefit, or receiving Maternity Allowance.
Pension age in the UK
As of November 2018, state pension age is currently 65 for both men and women, and is due to rise to 66 in October 2020, and 67 in 2028.
The legal pension age in the UK is currently undergoing changes to steadily bring women’s retirement age in line with men. Originally for men born before 6th April 1945 and women born before the 6th April 1950, the UK pension age was 65 and 60 respectively.
State pension age is expected to rise to 68 between 2037 and 2039.
A default UK 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 – and doing this will increase your pension entitlement.
In the UK you have to apply to claim your pension, so to defer you simply don’t put in your application for your UK pension.
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 – with some allowing you to take out money saved from 55-years-old. You should check with your provider, as this can vary.
What happens if you are not eligible for a full pension?
To receive the full UK pension, UK pension rules require a qualifying period of 35 years of contributions; if you contributed less than this amount, you’ll receive a pro-rata pension amount calculated on the UK 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, the UK pension eligibility doesn’t require 10 consecutive years. If you move abroad and return to the UK, you will still be able to draw a UK 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 may be able to claim more from your state pension.
If you’re a foreign national living and working in the United Kingdom, it’s important to know what will happen in terms of your UK pension entitlement.
As an expat, providing you meet the qualifying period for contributions, you should be able to claim a UK pension on reaching the retirement age.
You can also take advantage of enrolling in occupational pension schemes (if you aren’t already part of the automatic enrolment) and private pension schemes.
QROPS: transfer and consolidate your UK pension
Expats moving abroad from the UK may be able to transfer their pensions into a Qualified Recognized Overseas Pension Scheme (QROPS). QROPS allows expats to consolidate their pensions into one plan. This helps them manage their retirement funds more easily and avoid currency fluctuations.
There are many advantages to QROPS, however they are not suitable or available to all UK pensioners, so we highly recommend you take advice from an expert financial adviser such as AES. Read more in our full guide to QROPS.
If you retire outside of the UK
However, there may be different restrictions and taxes applied if you decide to move somewhere other than the UK for your retirement.
Tax rates will depend on bilateral agreements between the UK and the intended country of residence, which in some cases can result in having to pay tax both countries.
You have two options with regards to your combined pension pot in this case: You can leave your pension pot in the UK and withdraw it from abroad, or you can move your combined pensions abroad or a combination of both. It’s important to seek advice, however, as the tax implication could reduce your pension entitlement.
For residents of EU and EEA member states, it is possible to combine state pensions from other member countries to enable you to qualify for a state pension in each country where you meet the criteria.
To do this, you need to apply to the pension office in the last country you worked in, where they will exchange information with other relevant EU members to calculate your pension allowance for each country. See an explanation of how this works.
However, it is not known whether, or how, the terms of this will change after the UK leaves the EU.
There are similar agreements between the UK and Barbados, Bermuda, Canada, Chile, Israel, Jamaica, Jersey and Guernsey, Mauritius, New Zealand, the Philippines and the United States.
This means that citizens from these countries residing in the UK can also draw state pensions from both countries, although it will be calculated pro-rata (based only on the years you worked in each country, hence typically a lower rate).
Those who qualify for a full UK state pension can expect to receive about of £168.60 per week or £8767.20 during the 2019/20 tax year – the rate increases each year.
Your final UK pension rate depends on your National Insurance record, so you might receive less than this if you haven’t made 35 years’ worth of contributions.
Your total UK pension contributions are calculated against a number of factors to create your UK pension rate. Low-income earners, or those on National Insurance Credits, have their National Insurance paid by the government to ensure there are no gaps in their National Insurance records.
The new UK pension operates under a triple lock system, meaning that each year it will be increased by whichever is higher:
- earnings – based on the average percentage growth in wages
- prices – based on the percentage of price growth, or the Consumer Prices Index (CPI), measured in the September of each year
If you choose to work past state pension age, your UK pension rate will increase by 1% for every five weeks you defer, up to 10.4% for every full year. Deferring the full state pension for a year will see your payments increase by £142.64 per week in 2019/20.
The extra UK pension rate is paid alongside your regular UK pension amount.
Plus, if you continue working, you won’t typically pay National Insurance after you reach the UK pension age (except for self-employed workers who qualify for Class 4).
You will still have to pay income tax, however, if your total income is more than your tax-free allowances (the amount of income you can have before paying tax). In 2019/20, this is £12,500 per year.
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.
UK 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, and 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.
UK 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 UK pension provider, or at most UK 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 UK 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 UK pension fund.
Another way to save for your retirement in the UK is to open a lifetime Isa.
For those living and working in the UK, and aged between 18-39, it’s a government-backed savings account, where you can pay in up to £4,000 in each tax year, and anything you pay in is boosted with a 25% bonus from the UK government.
Bonuses are paid each month, but if you’re saving for retirement you can’t access the money until you’re 60-years-old. Withdrawing money before this time will result in a 25% withdrawal penalty charge.
You can only make contributions into the account until you’re 50.
It is always advisable to seek advice from a financial advisor or your local pensions office. As an expat, it is prudent to seek advice in all countries where you have participated in pension schemes, or consult an international advisor, to ensure you maximise the amount of pension income and avoid unnecessary tax penalties.
When it comes to claiming your UK state pension, all residents must personally instigate procedures with their local pension service, as the UK pension isn’t issued automatically.
Three to four months before you reach the UK pension age, you should receive a letter from the UK pension authority. If you’re living outside the UK, this means you will need to keep them up-to-date with your personal details, or contact them directly when you’re nearing the UK state pension age.
You can also make a claim online to receive the state pension within four months of reaching the UK pension age.
If you have a UK workplace pension or private pension plan, you should allow yourself plenty of time to contact your pension provider to ensure you start getting income when you reach retirement age.
The Pensions Advisory Service (TPAS) provides free UK pension advice to residents regarding their state, company and personal UK pensions, as well as helps those who have a problem with their occupational or private pension arrangement.
The government supports several agencies that provide free advice and information on your UK pension entitlements, including UK pension calculator tools:
- Claim a UK state pension online
- Plan your UK retirement income: a guide to calculating your income requirements and pension amount.
- UK pension service contacts: phone numbers and departments that can help with your state pension
- Government pension website for Living Abroad
- The Money Advice Service: UK pension calculator, plus government-supported financial and pension advice.
- Pension Wise: free and impartial government advice about defined contribution (DC) pensions.