The proposed new UK state pension overhaul will introduce a flat-rate pension for everyone. How will that work in practice for British expats who are now living in Thailand and elsewhere? Some will be adversely affected while others will experience a pleasant surprise.
Which group will you end up in?
Readers have had a number of questions relating to the changes intended by the government, which it hopes will streamline the state system into a more modern version to fit the overall pension landscape. The government has already set the current pension trend as all employees in the UK are now required to be enrolled in a private scheme.
The UK state pension developed over many years and eventually became a system that could reward higher earners or defer such benefits in favour of membership in a private scheme.
There was therefore an opportunity to contribute and reap rewards through an enhanced scheme, known as the state earnings related pension scheme.
During the earlier years of the scheme's existence 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. The requirement for a state-enhanced scheme is not really necessary because all employees in the UK must now be enrolled in private employer pension schemes. Therefore the proposal is that every person entitled to a pension will enjoy exactly the same benefits as the next person.
However, there are still people whose contributions give them added government benefits but who have not yet retired and thus are not in a position to enjoy their additional benefits.
To make a clean break between the different benefits systems is impossible, and a transition from the current state enhanced scheme to a single flat-rate pension could take a while if undertaken properly. This transition period could also be difficult to administer. During the relatively short period of changeover, some people will experience losses and others gains.
The new single flat-rate scheme is intended to be a simple one-rate pension for all who qualify. There will be no differentiation based on gender or marital status. If you paid your contributions you will get the pension. That must seem relatively reasonable to most young people these days. But what about the older people who have made their life plans based on the known factors at the time?
If you are one of the UK subjects who were paying additional contributions in the earnings-related state scheme years ago, what will happen to your pension now? During the transition period you may find yourself missing out on benefits you have accrued simply because you are the wrong age.
UK Pensions Minster Steve Webb told Parliament that in a world where everyone will be automatically enrolled in a workplace pension scheme, it no longer makes sense for the state to run its own earnings-related scheme. In the same speech he went on to say: "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."
The fact is, there are a great many people from the baby-boom era who represent "those closest to pension age". Are you one of those?
If you are a British expat living here in Thailand and have already retired, you may well lose out. Apparently the rules will not change pension rates for those already retired. If you are a lucky one and have not quite retired but were "contracted out" because you were enrolled in an employer-sponsored scheme, then you will gain because the flat-rate pension is set to go up from the current maximum of about 107 (4,800 baht) per week, for a single person, to 142 per week for everyone.
However, the new scheme also pays individuals rather than married couples. This means that if you have a wife who has not made contributions to the UK scheme, then you will not be entitled to a married pension and she will not have any pension at all.
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 regarding having your pension level frozen from retirement will apply to expats in countries such as Thailand. You may be thinking that this would surely be a continuation of the current discrimination. It would also continue the messy administration.
Rather than everyone having the same rate, there will be a huge number of different rates if the pensions paid to expats in these countries mean they have a frozen pension level for the remainder of their lives.
Under current rules, in order to qualify for a state pension, an individual must have made contributions to the national insurance fund for a total of 30 years. 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 seven years of Class 3 contributions to qualify for this new benefit. Maybe this all adds up to an increase in revenue and a decrease in cost?
Although it has been stated that "additional transitional arrangements will protect the position of those who have pre-implementation national insurance contributions", there could be a number of ways this would be interpreted.
Another new rule says that entitlement is based on "individual qualification, without the facility to inherit or derive rights to the state pension from a spouse or civil partner". In other words, the widow's pension is being abolished.
Many concerned British expats have approached me regarding their own situations. Although we all appreciate that changes need to be made, these often occur at the expense of some unfortunate individuals. In this case it could be a large number of baby boomers.
In making plans for retirement, there are a number of British expats who have made their Class 3 contributions to preserve their basic state pension.
While this possibility is not being removed, it appears that there are some specific disadvantages to the expat who has made this part of his planning strategy.
I am sure there will be further developments on this matter and I will keep you updated as they become relevant.
Andrew Wood has been an expat in Asia for 32 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or e-mail to firstname.lastname@example.org
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- Writer: Andrew Wood