Ex-UK pensions minister: How Brexit could affect expat retirees

The decision by UK voters to leave the European Union “could have far-reaching impacts on pensions and pensioners, both at home and abroad”, former UK pensions minister Steve Webb has said.

Although the immediate and significant fall in the value of sterling in the wake of last Thursday’s Referendum was more than a minor inconvenience for those already living overseas, who depend on a pension payment paid out in pounds sterling, the question of whether state pensions will continue to be up-rated once the UK leaves the EU is, for now and probably for some time to come, a major uncertainty, according to Webb, pictured.

Webb, currently director of policy at Royal London, the London-based mutual life insurance company, outlined his concerns for overseas pensions in a column published a few hours ago on the Money Observer website.

According to Webb, “those who are receiving a national insurance-based state pension from the UK government but who are living in another EU member state” are the ones at risk of ceasing to have their pension payments “up-rated” annually, the way they are for those who remain in the UK but, in the case of certain other popular expat retirement, not in all.

1.24m receiving British state pensions

As at September 2014, there were 1.24m people receiving British state pensions but living outside the country, Webb notes, “and nearly half of these (around 560,000) live in countries such as Australia, New Zealand, Canada and South Africa, where their state pension is frozen at the rate it was when they left the UK.

“The big question is whether British expats living in EU countries such as Spain could find themselves in the same position,” he adds.

Frozen pensions issue

“The issue of frozen pensions has a long and complex history, with its origins in the creation of the national insurance system after the Second World War. When the new pension was introduced, it was not payable at all to those living abroad.

“In 1955 the rules were changed to allow pensions to be paid worldwide, but there was no mention of annual up-ratings. However, it would be fair to say that inflation was much lower in those days and, even in the UK, pension increases were by no means an automatic annual event.

“Between the creation of the new pension system and 1973, around 30 country-by-country deals (known as reciprocal arrangements) were struck, which allowed for annual increases to be paid in certain countries.

“This was mainly done in the context of trying to make it easier for people to move freely between countries during their working life without suffering penalties in retirement for doing so.

But very few new deals were done after this date, not least because double-digit inflation meant that it was becoming increasingly expensive to up-rate pensions.

‘No guarantee’

“The current situation is that pensioners living in the EU, other EEA countries such as Norway, Iceland and Liechtenstein, and also in Sweden can receive up-ratings, but there is no guarantee that these arrangements will continue following Brexit.”

Webb concludes his article by noting that because the UK government may look to save money by ending the up-rating of the state pensions of those who retire to the EU – and with fewer than 100 overseas voters, on average, still on the UK electoral register in any of the UK’s average parliamentary constituencies – expat pensioners who might be affected by a freeze on EU pensions might have to “mobilise their friends and family living in the UK, as well as getting themselves back on to the UK electoral register where possible” in an effort to ensure EU-bound UK state pensions don’t get the up-rating chop.

Says Webb: “There is no guarantee that future state pension increases will be paid, but there will be considerable political and practical pressure on the government to find a way to preserve the existing system.”

AJ Bell

In May, as reported, UK-based stockbroker and third-party pension fund administrator AJ Bell  estimated that “the loss of up-rating [of a British pension] would cost around £50,000 over 20 years”, in the case of an  individual aged 65 in receipt of the £155.65 flat-rate state pension who begins to take their pension in a jurisdiction in which up-rating doesn’t take place.

472,000AJ Bell estimated that as many as 472,000 UK citizens who have retired to EU and who currently receive fully up-rated pensions could be affected.

To read Webb’s piece on the Money Observer website, click here. 

ABOUT THE AUTHOR
Helen Burggraf
Helen Burggraf is the editor of International Investment. A US-trained journalist, she has worked in Rome, New York City and London, covering everything from the fashion and retailing industries to the global drinking water and water-treatment sector, private equity, and most recently, the international cross-border financial services/advice industry.

Read more from Helen Burggraf

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