Tax loophole can boost expats frozen state pensions

Expats might beat the government’s ban on linking state pensions to inflation if they live in certain countries by opting to exploit a pension law loophole.

A little known rule in the Finance Act 2005 says that if expats defer drawing their state pensions for at least a year, they can withdraw the amount as a one-off lump sum or enhanced weekly payment at the standard rate.

This rule does not apply to expats whom have already retired and started drawing their pension.

The index-linked gain is because the state pension is deferred and paid at the standard rate, the pension has some inflation linking.

The catch is once the state pension is withdrawn; future pension payments are frozen at the amount of the first payment.

The rule is of significance to hundreds of thousands of expats who live outside Europe in countries with strong Commonwealth links like Canada, Australia, New Zealand and South Africa.

Expat Pension

Currently more than 500,000 British expats who have retired overseas have their pensions frozen at the payment amount when they first draw their state pension.

Their case bidding to force the government to index link all state pensions disregarding where the expat lives is before the European Court of Human Rights and a ruling is expected in March 2010

Of course, any expat planning to defer taking their state pension would need to have other cash to support their lifestyle.

Pension rules say anyone deferring their pension is compensated for the amount foregone by receiving enhanced weekly pension payments once a claim for payment takes effect as part of the Government’s policy of encouraging flexible retirement.

Other special rules apply if the pension was deferred before April 6, 2005.

Normal state pension requirements, like the expat reaching the state pension age and having a sufficient National Insurance Contributions record also apply.

The loophole does not change the way any state pension payments might be liable to income tax.

Anyone drawing their pension will have to wait for the European court ruling to see if their payments will be index linked.

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