Millions of Britons dream of a retirement abroad, but they could be overlooking a costly hidden trap in the state pension system.
The impact can be severe if you move to a country where the UK state pension is frozen, according to new analysis from wealth manager Rathbones. Under the triple lock, the state pension rises each year by the highest of inflation, average earnings growth or 2.5%.
The triple lock uplift applies when moving to certain countries, including in the EU, but in popular destinations such as Australia, Canada, New Zealand and South Africa, payments are frozen at the rate first received, with no future increases.
Olly Cheng, a financial planning divisional lead at Rathbones, said many of its new clients fail to realise that their choice of retirement destination could significantly affect their state pension entitlement.
If your pension is frozen when you move abroad, the triple lock increases stop entirely, he said: “What looks like a modest shortfall at first can quickly snowball into tens of thousands of pounds in lost income over retirement.”
A pensioner living overseas for 20 years could lose a total of £77,585 in state pension income alone, entirely due to missed annual increases. Even after 10 years abroad, retirees could be more than £18,600 worse off.
That lost income has to be replaced from somewhere. Around £3,880 a year, or £320 a month, would need to be funded from other income sources to make up the shortfall over 20 years, Cheng said.
Check the rules in your chosen destination, and while you’re at it, check your personal National Insurance record to see if you’re entitled to the maximum state pension. He added: “It’s also 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. Taking professional advice can help avoid costly mistakes later.”