The proposed new UK state pension overhaul will introduce a flat rate pension for everyone. How will that work in practice for expats living in Thailand and elsewhere? Some will be adversely affected whilst others will experience a pleasant surprise. Which group will you end up in?
The government has made an announcement that it will streamline the state pension system into a more modern version to fit the overall pension landscape. There is now a requirement for all employees in the UK to be enrolled into a private scheme.
In the UK the state pension developed over a number of years and eventually became a system which could reward higher earners or defer such benefits in favour of membership to a private scheme. Thus there was the opportunity to contribute and reap rewards through an enhanced scheme, known as the state earnings-related pension scheme (SERPS).
During the earlier years of SERPS this was the only pension benefit a citizen could rely on. Making contributions, or buying stamps as it was known then, gave each person the right to a state pension in retirement.
This is not as relevant today and thus a state enhanced scheme is not necessary anymore. Instead, the proposal is that every person entitled to a pension will enjoy exactly the same benefits as the next person.
However, a clean break between the different benefits is all but impossible. Similarly, a transition to a single flat rate pension could take a while if undertaken properly and become difficult to administrate. So instead there is to be a relatively short period of changeover which means there will be losses and gains encountered by individuals.
The new single flat rate scheme is intended to be a simple one-rate pension for all who qualify. There will be no differentiation between sexes or marital status. If you paid your contributions you will get the pension. But what if you are one of the UK subjects who were paying additional contributions to SERPS years ago? What will happen to your pension now? During the transition period you may find yourself missing out on benefits you have accrued because you are just the wrong age.
UK pensions minister Mr Steve Webb told parliament: “Transition is the messy bit. It is particularly important to those closest to pension age. It is complicated and messy in the early years but very quickly works its way through the system”.
It does not take much to realise that there are a huge number of people from the baby boom era who represent “those closest to pension age”. Are you one of those? If you are a retired expat living here in Thailand you may well lose out. Apparently the rules will not change pension rates for those already in retirement. If you are one of the lucky ones and have not quite retired but were “contracted out” because you were enrolled in an employer-sponsored scheme then you will gain. The flat rate pension is set to go up from around the current £107/week for a single person to £142/week for everybody.
Mr Webb also stated that the scheme would be revised every five years. Although an annual increase based on average growth in earnings has been mooted, there has been no mention of whether the current rules about having your pension level frozen from retirement will apply to expats in countries such as Thailand. This would surely be a continuation of the current discrimination?
Currently, an individual must make a total of 30 years of national insurance (NI) contributions in order to qualify for a state pension. The new scheme calls for a minimum of 37 years. So, if you are a baby boomer expat you may need to pay an additional 7 years of class 3 contributions to qualify. Although it has been stated that “additional transitional arrangements will protect the position of those who have pre-implementation NI contributions” there are a number of ways this could be interpreted.
There is also a new rule stipulating that entitlement will be based on “individual qualification, without the facility to inherit or derive rights to the state pension from a spouse or civil partner”. This means that if you have a wife who has not made NI contributions then she will not be entitled to a married pension nor a widow’s pension and thus she will not have any pension at all.
Many British expats have approached me regarding their own situations and voiced their concerns. Although we all appreciate that change needs to be made it looks in this case as if it will be done at the expense of a large number of baby boomers.
In making plans for retirement there are a number of British expats who have contributed their class 3 contributions to preserve their basic state pension. Whilst this is not being removed it appears that there are some specific disadvantages to the expat who has made this part of his planning strategy.
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Andrew Wood has been an expat in Asia for 32 years and is Executive Director with PFS International. He has been writing Net Worth articles for four years and has made a significant contribution to the PFS library of financial service articles dating back over seven years. These articles which cover the complete A-Z of financial planning are available to readers upon request.
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