Navigating the complex landscape of pensions and retirement funds can be daunting – especially when living in a foreign country. Many foreign residents of Japan think that they do not need to think about retirement planning as long as they make contributions to the Japanese National Pension system, but if you’ve lived and worked in the UK, you may be overlooking a useful tool that can help you increase your monthly income in later life.
Understanding UK Pensions
The UK State Pension is a retirement benefit provided by the government to ensure individuals have a basic level of income when they retire. It’s designed to assist in supporting an individual’s needs during retirement after having worked and contributed to the system for a significant portion of their life.
Beyond the state pension, the UK also offers workplace pensions and personal pensions. These work as follows:
UK Workplace Pensions:
- Offered by many UK employers, workplace pensions (also referred to as occupational or company pensions), come in two main types. The first, called a “Defined Benefit Scheme”, bases the pension benefits on factors such as the individual’s salary and duration in the scheme. The amount one receives upon retirement is calculated using a specific formula based on the scheme’s rules.
- The second type of work pension is called a “Defined Contribution Scheme”. With this system, both the employer and employee contribute regularly to a pension fund. This fund is invested in a variety of assets, often including stock, bonds, and funds. The final retirement amount of a Defined Contribution Pension is calculated based on the investment’s performance and the total contributions over the years.
UK Personal Pensions:
- Beyond employer-offered pensions, individuals in the UK can establish personal pensions to further bolster their retirement savings. Known as private pensions or SIPPs, these are generally schemes where people make regular contributions to a fund that is then invested on their behalf. Various financial institutions, like banks, insurance companies, or investment firms, offer these pension plans.
Benefits of UK Pensions for Residents of Japan
If you’re a resident of Japan, you may wonder if there’s any benefit in receiving a UK pension. Although you certainly wouldn’t want to rely on your UK pension – or any national pension system – for your retirement income, it is certainly worth taking advantage of if you qualify. Even if your goal is to retire in Japan, receiving a UK pension can offer advantages such as:
- -Supplementary Retirement Income Stream: The UK State Pension, once commenced, provides a regular income source. This stream of income can act as a supplement to other financial resources and assets, offering a steady and predictable income stream.
- -Potential for Enhanced Payouts: Under certain circumstances, such as deferring the State Pension or having a considerable Additional State Pension, individuals might receive more than the typical State Pension amount.
- -Eligibility Despite Other Pensions: Once you have satisfied the eligibility requirements for the UK State Pension, you remain eligible for the UK State Pension. This is true even if you have other forms of pensions, such as personal or workplace pensions, providing an added layer of financial security.
- -Appreciating Value of Final Salary Pensions: For those who have Final Salary Pensions, the value of this pension type increases from the departure date from the associated company up to the retirement day. This increment can serve as an added advantage for planning one’s retirement, especially with annual increases between 4.5% to 8.5% up to retirement age.
- -Currency Diversification: Receiving a pension in GBP (British Pounds) allows for diversification of currency holdings. Given currency fluctuations, having pensions or assets in multiple currencies might offer some protection against adverse shifts in any one currency and provide further diversification to your Japanese retirement and pension plans.
- -Protection of Guaranteed Minimum Pension (GMP): The GMP undergoes annual increments according to the supporting legislation, ensuring the pension keeps pace with legislative adjustments and can augment between 4.5% to 8.5% annually.
The UK system offers tax relief on pension contributions, encompassing up to 100% of annual earnings. However, the tax implications of receiving an overseas pension in Japan can become quite complicated. In fact, all potential benefits must be weighed against potential implications due to Japanese tax and income laws.
A financial expert or international financial adviser familiar with both the UK and Japanese pension systems can help individuals sort out these implications and make full use of their UK State Pension benefits. But how do you know that you qualify for them in the first place?
How Can You Qualify For Your UK Pension While Living In Japan?
The good news is: if you have ever lived and worked in the UK, there’s a chance you’ve accrued pension benefits during your time there. To be eligible for the new State Pension, you need to be a male born on or after 6 April 1951, or a female born on or after 6 April 1953.
(Note: If you reached the State Pension age before 6 April 2016, you fall under the basic State Pension scheme instead of the new rules.)
A crucial aspect of the UK pension system is the National Insurance record. Typically, at least 10 qualifying years on this record are required to obtain any State Pension, but these years don’t need to be consecutive. During these 10 years, you must have either worked and made National Insurance contributions, received National Insurance credits (due to unemployment, illness, or being a parent or carer), or made voluntary National Insurance contributions. This applies even if you’ve lived or worked outside of the UK.
Claiming Your UK Pension From Japan
To claim your UK pension, you must be within 4 months of reaching your State Pension age (the current pension age is 66). To start the process, you can contact the International Pension Centre via an online contact form or submit an international claim form that is available on their website.
(Note: Whether you live in Japan full- or part-time, you must designate a single country to which you will receive your pension payments.)
The State Pension can be disbursed either into a local bank in Japan or a UK bank or building society. Whether it’s an account solely in your name, a joint account, or someone else’s account (with their consent), payments can be facilitated. However, for international transfers, you’ll need the international bank account number (IBAN) and bank identification code (BIC). Since payments are made in the local currency, fluctuating exchange rates can affect the amount you receive.
At this time, the International Pension Centre offers flexible payment schedules. You can opt for payments every 4 or 13 weeks. However, if your UK State Pension is under £5 weekly, you’ll receive your payouts as an annual lump sum each December.
Considerations For Receiving Your UK Pension In Japan
As mentioned, there are some considerations to bear in mind when receiving an overseas pension in Japan. Two significant concerns are Japanese income tax and inheritance tax.
- -Japanese Income Tax: If a resident of Japan withdraws money from a UK pension, Japan will see this as foreign income. The Pension Commencement Lump Sum (PCLS) you receive would be taxed as income in Japan.
One solution to this problem could be acquiring an NT code (nil-tax code) from HMRC (Her Majesty’s Revenue and Customs). A nil-tax code allows you exemption from UK income tax on certain incomes. This could potentially protect you from being taxed twice – once in the UK and then again in Japan.
- –Japanese Inheritance Tax: Depending on the type of pension you receive, your remaining pension payments can be passed to your beneficiaries after your death. Technically, this transfer is separate from your regular estate. Specific details need to be established by filling out the appropriate paperwork, such as an Expression of Wish or Nomination form. (Note: State Pensions in the UK typically stop after the pensioner has died, but there are some exceptions depending on how much you and your spouse have accrued.)
In many cases in the UK, pension transfers to beneficiaries after the pensioner’s death are untaxed. Unfortunately, this is not the case in Japan. Japanese law treats transferred pension benefits as an inheritance. As such, these benefits will be subject to Japanese inheritance tax – which can reach as high as 55%. This means that over half of the leftover pension could be lost.
Maximizing your UK State Pension and avoiding excessive taxation requires thoughtful management and knowledge of international tax law and tools such as QROPS (Qualifying Recognised Overseas Pension Schemes). If you’re not sure how to make the most of your UK Pension (or if you qualify), consider consulting with an experienced financial planning professional. A trusted adviser can help you understand the requirements and implications of receiving your UK pension abroad and give you peace of mind knowing that your assets are secure.