Guide to Pensions and Working Abroad



Increasingly, more and more of us are finding that out jobs take us abroad for periods of time. Often, it may just be a matter of a few weeks or months. But for an increasing number, that period of working abroad can run to years or longer.

If that happens to you, what happens to your pension while you are working abroad?

What type of pensions are there?

There are three key elements to any pension planning before you leave the UK:

• Occupational pension

• State pension

• Personal pension

Occupational pensions

• All UK occupational pension schemes have to be approved by the Inland Revenue to ensure that they meet its rules. This ensures that contributions remain eligible for generous tax reliefs. This simple fact has a bearing on what follows

Permanent transfer: if you transfer abroad permanently, and thus lose UK taxpayer status, then you will no longer be eligible for membership of an Inland Revenue-approved pension scheme.

It may be to your advantage to join a local scheme, particularly if you intend to retire in the country in which you are going to work.

If you are in this situation, then you may seek to transfer your pension benefits across borders, but there are strict limits on the extent to which the Inland Revenue’s Pension Scheme Office (PSO) will allow you to do this.

All requests for transfers are considered on an individual basis and will be made on the basis of documentation that the PSO will seek from you.

There are also tax issues involved: not all other countries apply the same tax reliefs to pension schemes. So you will need to talk to your employer – and an independent financial adviser, expert in local tax laws – for guidance as to what to do.

If you subsequently return to the UK and join an approved scheme, you may apply to transfer benefits from an overseas scheme and, provided you have a two-year service record, there should not be a difficulty from the point of view of the Inland Revenue.

Temporary postings:
if you are posted abroad temporarily then, as a general rule, you should be entitled to stay within your existing occupational scheme. Your employer can continue to pay contributions into the scheme on your behalf, and you will be allowed to make tax-deductible contributions too.

But any rights in this area are fundamentally determined by the wording in your pension scheme’s “trust deed”, a set of rules that govern how it is run.

Remaining in the UK scheme has the advantage of simplicity and will allow you to continue building up benefit entitlement in your scheme.

As far as the Inland Revenue is concerned, people posted overseas temporarily may retain membership as long as they meet the following circumstances:

• They are still subject to UK tax because they work overseas for less than 365 days per year

• The overseas posting is in the nature of a secondment, with the intention of returning to the UK company (or to retirement) at its end. The secondment may be for up to three years, although the PSO is able to extend this by another six months

• The secondment is to an overseas subsidiary under the control of a UK employer

• Your UK employer continues to pay employer contributions into the scheme

Logic suggests that before you take up an overseas assignment, you should check that you meet the conditions for continuing membership in your scheme.

Additional points to check

If you are able to stay within your occupational scheme, you will need to arrange that both your employer’s and your own contributions (including AVC top-ups) will continue to be paid during your assignment.

In turn, this may have implications for how (and where) your salary is paid, for

example, if you are receiving tax relief on your contributions through PAYE.

“Double taxation” agreements cover any pension contributions you make to your UK scheme while working abroad – as long as the UK scheme is recognised as having “corresponding status” to one in place where you work.

In short, you will be entitled to tax relief in your “host” country on the pension contributions that you make here.

Employees of an overseas company

If you are an employee of an overseas company, then you will be entitled to tax relief on your contributions to a scheme in the host country.

However, the PSO must agree that the pension scheme of your overseas employer is a “corresponding’ one – that is, it corresponds to the requirements for a UK-approved scheme.

Also, you will be exempted from tax on the contributions made by your employer.

There is a 10-year limit in terms of your service abroad, although the Revenue can extend that in exceptional circumstances.

Also, you must satisfy the Revenue that there is a “definite expectation” you will be returning to the UK to retire. Alternatively, your earnings must be taxable in the UK because you have spent less than 365 days abroad.

State pension

Your entitlement to a state pension is based on the National Insurance Contributions you make.

Insofar as your existing NI contributions are concerned, they will count towards your state pension at retirement.

The real issue is that of what happens to your future contributions and whether you can continue to build on your UK state entitlements while working abroad.

• If you are not expected to be abroad for more than 12 months, you will usually carry on paying NI contributions

• If you are taken on by an employer or by an agency in the UK to work for them in another EEA country, you can only carry on paying NI contributions if the employer or the agency normally carries out significant business activities in the UK

For you to keep paying NI contributions here in the UK, your UK employer must apply in your name. If it can be issued, this form tells the social security authority in the other EEA country that you will carry on being insured under the UK scheme.

If you are going to work abroad for more than five years, there is a strong possibility that you may be asked to contribute to that country’s social security system, especially if you are deemed to be “non-resident” and paying taxes over there.

EEA countries

For those who move to work in a country within the European Economic Area (EEA) country, this should not prove to be too much of a problem.

The European Economic Area (EEA) involves one of most important multilateral social security agreement in Europe.

In effect, this means that countries within the EEA have agreed treaties that allow the reciprocal payment of taxes and of benefits to members of each state. Payment of taxes in those countries may be counted towards pension rights in another country.

The countries involved include: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Spain, Sweden, Turkey and the UK.

Three European Free Trade Agreement (EFTA) countries (Iceland, Lichtenstein, and Norway) are also included in this agreement.

Basic rules of the agreement

• Employees should participate in the social security or insurance system of the country in which they are resident

• In practice, when an employee continues on a home employment contract they can remain covered under their “home” system

• Most countries impose a five-year limit for this procedure. After this time, employees usually either return home or join that country’s social security system

• Social security contributions in one EEA country can count towards eligibility for benefits in another under what is known as a “totalisation” agreement

There are some instances when this will not apply. Two or more countries in the EEA may agree to treat you in a different way, as long as it is in your interests.

For example, an agreement may be reached so that you stay insured under the UK social security scheme:

• If you have special knowledge or skills in the job you are doing

• Or your employer has a special job that it needs you to do, in the other EEA country

How to claim your pension

You can claim your pension directly from any EEA country in which you have been insured. Or you can claim from the EEA country you live in when you are getting near state pension age.

• If you have been paying the equivalent of NI or social security contributions in another EEA country, you will be sent a form by the Department for Work and Pensions about four months before you reach UK state pension age

• The form will ask you if you want to claim a UK State Pension. It asks you to tell us about any insurance and residence you may have in other countries

• If you claim state pension in the EEA country where you live, that country will pass details of your claim to any other EEA country where you have been insured

How your claim is worked out

Each EEA country where you have paid insurance towards a pension will look at your insurance under its own scheme and will work out how much pension you can have.

As long as you meet the rules, you will get a pension from each country.

Each country will also look at any insurance you have in another EEA country. This can help you to get a pension, or a higher pension, under its own scheme.

To do this, each country sends details of your insurance record to the others.

Each country then works out how much to pay you.

They do it in two ways:

Method A

Each country works out how much pension you can get, just from what you have paid into its own social security scheme.

Method B

Each country adds together your insurance in all countries. Then each one sees how much pension you would get if your insurance had all been paid into its own social security scheme. But each country only has to pay you part of this. How much it pays you depends on how much you have paid into its scheme.

For example, if one-third of the insurance you have paid was from the UK, then the UK would pay one-third of the total pension it has worked out you could get. All the other countries usually work out how much they are going to pay in the same way.

If a country has worked out your pension using Method A, it will usually pay it to you while you wait for Method B to be calculated. If your pension is higher under Method B, you will get the higher one without having to ask.

Any UK graduated contributions you have paid are not used in working out Methods A and B. But you can get a pension from these contributions whether or not you get a pension using Methods A or B above.

What about non-EEA countries?

A range of different arrangements apply. It is better here if you speak directly to the Pension Service International Pensions Centre, who can be found here.

Personal pensions

Existing pension funds can continue to grow, free of tax in the UK, as before. At retirement age, you can elect to take a pension with that money and be paid in the country you are now living in, or the UK if you return.

Future contributions

If you take out a personal or stakeholder pension while a resident of the UK, then you can leave the country and continue to contribute to that pension for another five years, in addition to the remainder of the tax year in which you started the pension.

If, while working abroad, you spend on average fewer than 91 days a year in the UK, you will be classed as “non-resident” and not “ordinarily resident”. After five years, if you are a non-resident, you must stop paying into the pension.

At which point, you can:

• Start a new pension in your new country of residence and transfer the UK fund into it. This is often complicated and you will need specialist advice on whether it is a sensible step

• Leave the UK fund where it is and draw on it at retirement

• Return to the UK, re-establish residency and go off again for another five years

Changes to the rules

The Inland Revenue is proposing to do away with the five-year limit and allow unlimited contributions, but remove the tax relief for non-residents, although it is not clear when these changes will come into being.

If they do, there is not much point continuing to make contributions into a UK pension scheme.

If you are leaving in the current tax year or the next tax year, it may be worth setting up a personal or stakeholder pension just before you go: assuming that the changes are not retrospective – and they usually are not - that should give you at least five years’ worth of potential contributions.