Pensioners retiring to sunnier climes this year could miss out on £77,500 of state pension payments, new analysis shows.
Britons retiring in popular later-life hotspots like Australia, Canada and New Zealand have their state pension payments frozen when they move – a major setback in their later life planning.
Unlike retirees who remain in the UK – or move to certain countries who have agreements – many who retire abroad do not get the full triple lock uplift, a rule that can blow a £3,880 a year hole in their budgets, according to wealth manager Rathbones.
Some 450,000 British pensioners living overseas are already affected by the frozen pension policy, it says, largely living in Commonwealth countries.
The triple lock is lauded as the golden mechanism that protects pensioners from rising costs.
It is a promise to increase state pension payments every year by the highest of inflation, wage growth or 2.5 per cent.
Payments rise by the highest of the previous September’s consumer prices index (CPI) inflation figure, average earnings growth from the previous May to July, or 2.5 per cent.
This year, earnings growth was used to determine the size of the pension increase as it stood at 4.8 per cent compared to an inflation rate of 3.8 per cent.
However, retirees who have moved to certain areas do not get an annual increase to their payments.
Their state pension income is frozen at the rate it is first received and doesn’t receive an uplift in line with the golden triple lock mechanism that protects pensioners from rising costs.
This means that a pensioner retiring abroad in 2016 to a destination like Canada has missed out on almost £19,400 in payments.
Olly Cheng, a financial planner at Rathbones, says: ‘If your pension is frozen when you move abroad, those increases stop entirely.
‘Over time, inflation steadily eats away at its value, meaning your state pension buys less each year in real terms.
‘What looks like a modest shortfall at first can quickly snowball into tens of thousands of pounds in lost income over retirement, and once your pension is frozen, there’s very little you can do to undo the damage.’
After five years abroad retirees miss out on £4,865 in state pension payments, £18,614 after ten years, and £42,414 after 15 years, according to calculations from Rathbones.
Over the course of a 20-year retirement, these retirees will miss out on £77,585.
This assumes that the pensioner moves abroad in this tax year and receives the full new state pension of £12,547.60 a year.
The calculations also assume that the payments are only uprated in line with the minimum 2.5 per cent each year under the triple lock.
Payments will probably rise by more than 2.5 per cent for a chunk of the next 20 years, so the loss of pension payments is likely be higher than £77,000 in reality.
Plus, if you live longer than 20 years after retiring abroad then the ‘gap’ between your expected payments and your actual payments only continue to climb.
It may mean you need to have a bigger private pension pit that you expected to supplement your income.
This £77,585 loss over 20 years is equivalent to £3,880 a year – a major shortfall that retirees would need to plug with their own private pensions and income.
Mr Cheng adds: ‘It’s vital to understand how much private income you’ll need to replace any lost state pension, as well as factoring in local tax rules, healthcare costs and currency movements, all of which can materially affect how far your money stretches overseas.
‘Anyone planning to retire abroad should start by checking their National Insurance record to make sure they’re entitled to the maximum state pension, particularly if future increases won’t apply.’
Retirees who reached state pension age after April, 2016, typically need 35 years of NI contributions to receive the full, new state pension.
A minimum of ten years of contributions is needed for any state pension entitlement.
However, there are ways to retire abroad and still get the full triple lock uplift every year.
Your state pension payments will still get the full triple-lock treatment if you move to a country in the European Economic Area, which includes Cyprus, Spain and Portugal.
Switzerland and Gibraltar are also exempt form the payment freeze, as are countries which have a special social security agreement with the UK including Barbados, Jamaica, Philippines, Turkey and the US.
As well as Australia, Canada and New Zealand, countries such as Bangladesh, India, Pakistan, South Africa and Thailand and many Caribbean islands are in the frozen state pension category.
