If you’re a British expat living in Australia, or you are an Australian who has moved home after working in the UK, and are planning to retire here, your retirement plans should include any UK State Pension income you’re due to receive.
It’s a potentially helpful regular monthly boost to your retirement income.
Read on to discover how the UK State Pension could benefit your retirement plans and six important facts about it if you’re living in Australia, which you should know before you take it.
1. The UK State Pension could add significant value to your retirement fund
The full UK State Pension is worth £9,627 a year, or approximately AUD $17,570 (14 December 2022), as of the 2022/23 UK tax year. It is paid for life from the age of 67, depending on the year you were born.
Australia has one of the world’s highest life expectancy rates of 83 years (2020 males and females at birth combined), so the UK State Pension could account for £154,044 (or approximately AUD $281,050) worth of income over the 16-year period from the normal retirement age.
It is important to note that, if you live permanently in Australia, your State Pension income will be taxed alongside other Australian earnings as part of a UK/Australia double taxation agreement. If you split your time each year between the two countries, your State Pension will be subject to tax in the UK.
2. You will need to claim it before receiving it
The State Pension is not paid automatically to you when you reach your State Pension Age (SPA) and you will have to go through steps to claim it. This is the case whether you’re based in the UK or abroad.
You’ll need to complete form IPC BR1 to claim your pension, which you can download from the UK government website. This can be done up to four months before you reach your SPA.
It is possible to get your State Pension paid directly into your Australian bank account. The benefit of this step is that you can take advantage of a favourable exchange rate as the UK government bulk buys currencies partly for this purpose, so you will typically get better rates than would usually be available to consumers.
3. The amount you’re due is based on your National Insurance contributions
Your National Insurance contributions (NICs), paid during your time living and working in the UK, play the vital role of determining the level of State Pension you’re entitled to receive.
It should be noted that to gain the full State Pension you will need to have at least 35 “qualifying years” of NICs. You normally accrue a qualifying year if you paid NICs while working, you have made voluntary NICs, or you received certain UK benefits.
So, aside from checking when you’ll receive your pension, you should also investigate what level of pension you are likely to receive and any contribution gaps that could be cost effectively filled to boost your retirement income.
4. Your State Pension won’t be protected by the “triple lock”
The UK government has recently reaffirmed its commitment to the “triple lock”, which provides the UK State Pension with protection from the eroding effect of inflation on its real value.
The triple lock works by increasing the State Pension in line with the highest of these three measures:
- Average wage growth between May and July against the same period the previous year
- Inflation – measured by CPI in the year up to September.
The State Pension then increases by at least the highest value of the three on 6 April going into the new UK tax year.
Prior to reaching SPA the annual income will be indexed each year. However, under the current rules, from the moment an Australian resident starts to receive State Pension payments, indexation will cease, as some UK State Pension holders residing overseas, including those in Australia, don’t qualify for this protection from SPA.
This means that your State Pension will remain at the same amount the entire time you receive it and will likely be diminished by the effects of inflation over time.
If you do opt to return to the UK once you’ve started taking your pension, it will be increased to the current UK State Pension value, as it would have had you not been residing abroad.
There are ways to mitigate the effects of inflation on your State Pension income, so its vital that you seek professional advice to help you navigate the matter.
5. You can top up your contributions retrospectively
There are ways to top up your UK State Pension retrospectively once you have an idea of what form of entitlement you are likely to receive.
You can make additional NICs to boost your qualifying years, for a maximum of six previous years, to increase your total and possibly unlock the full State Pension.
However, prior to 6 April 2023, there is an additional benefit available (dependent on your National Insurance record) in which you can purchase up to an additional 10 years of NICs for the years 2006 to 2016.
According to Martin Lewis, where you have a contribution gap, a retrospective payment to your NICs (class 3 for Australian residents) of approximately £800 for each year would provide an additional £275 a year to your State Pension income — an investment that would break even within three years — and could potentially see a boost to your pension of £5,300.
You can apply for approval to purchase class 2 NICs for each UK tax year you were self-employed/employed while living abroad. Class 2 NICs cost approximately £163 each year so the break-even is less than eight months. It’s important to provide as much detail as possible for approval for class 2 NICs where applicable.
You must have previously worked in the UK for a minimum of three years in a row, or paid at least three years of NICs, to be eligible to top up your record by making voluntary contributions.
It can be a complicated process and it is important to reach out to a financial planner to walk you through your UK State Pension journey.
6. You can opt to defer taking it and potentially increase your pension amount
In addition to topping up your NICs, you can also increase your State Pension value by deferring taking it for a period of time.
For every nine weeks you defer taking it, its value increases by 1%. So, if you defer for a year, it will likely increase by approximately 5.8%.
The decision to defer depends on your personal circumstances and whether you can afford to wait.
Claiming the UK State Pension can pose all kinds of added complications for those residing in Australia, so its important to take on as much advice as possible before deciding your best course of action.
Get in touch
If you have any queries regarding your UK State Pension and potentially topping up your NICs, it is important to get professional advice before undertaking your journey.
I specialise in managing pension issues for British expats or Australians who have previously worked in the UK and now reside in Australia.
I have a specialised fixed-fee client journey that will free you from the stress of managing your claim, so please get in touch, and we can develop a tailored solution that’s right for you.
Please email email@example.com or call 0498 740 840.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
This information in this email is general advice and does not take account of investors’ objectives, financial situation or needs. Before acting on this general advice, investors should therefore consider the appropriateness of the advice having regard to their objectives, financial situation or needs.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
Financial solutions for expatriates in Australia | Jason O’Connell is an Authorised Representative (“AR”) 1269423 Shartru Wealth Management. ABN: 46 158 536 871 operating in Australia under AFSL: 422409.