Brexit and State Pensions
Friday 08 September 2017
The British government have committed themselves to maintaining existing arrangements for pensioners in Europe, but just what does that mean?In their position paper 'Safeguarding the Position of EU Citizens Living in the UK and UK Nationals Living in the EU' published in June, the British government confirmed that:
• 'the UK will continue to export and uprate the UK State Pension within the EU;
• the UK will continue to aggregate periods of relevant insurance, work or residence within the EU accrued before exit to help meet the entitlement conditions for UK contributory benefits and State Pension, even where entitlement to these rights may be exercised after exit.'
In addition, following the latest round of negotiations in Brussels, both sides have agreed that:
'EU and UK citizens having worked or resided in the EU27/UK in the past shall, for the purposes of aggregation of periods of social security insurance, in accordance with Regulation 883/2004 be covered by the WA' and that, 'Contributions both before and after exit will be recognised for those covered by the WA.'
So what do these commitments mean?
Pension Export and UpratingThe export of UK pensions without reduction forms part of the 'portability' principle at the heart of the European social security system and which is also in place for UK pensioners in many other countries around the world.
This means that pensioners will continue to benefit each year from a 'triple lock', which guarantees that pensions will increase every year by the higher of inflation, average earnings or a minimum of 2.5%.
The Conservative Party were proposing to cut back on this ring-fencing, but following their disastrous election result in June they have stepped back from this plan.
Accordingly, British pensioners in Europe will continue to benefit from the triple lock, in the same manner as pensioners resident in the UK. Only if the triple lock is removed in the future for pensioners in the UK will it be equally applied to those living in Europe.
Pension CoordinationIn addition to the guarantee on annual increases, the government also intends to maintain arrangements in place on the coordination of pensions, a far more arcane but no less important part of the social insurance system in Europe.
These arrangements stem from European regulations dating from 2004, which provide for the aggregation of periods of insurance and administration of pension claims by the country in which the person is resident or last worked.
European Regulation 883/204 states: 'Unless otherwise provided for by this Regulation, the competent institution of a Member State whose legislation makes .....the acquisition, retention, duration or recovery of the right to benefits.....conditional upon the completion of periods of insurance, employment, self-employment or residence shall, to the extent necessary take into account periods of insurance, employment, self-employment or residence completed under the legislation of any other Member State as though they were periods completed under the legislation which it applies.'
If, as is the case with many tens of thousands of British nationals, you run a business or you are employed in France you pay insurance contributions towards a French pension.
This applies whatever your business or employee status, although a minimum earnings/turnover rule applies to earn a pension entitlement.
When you retire you can then claim a pension from France, and if you have earned an entitlement to a State pension from the UK you will also receive a pension, provided you have reached the State age of retirement for each country.
In theory, if you are resident in France at the time you retire, and you have earned a pension entitlement from both France and UK, you should apply to the French pension authority for both pensions, as they will then undertake administration of the pension claims.
In practice, many expats in France go direct to the UK pensions authority for their UK pension, and make separate application in France for their French pension, either because of a lack of congruence on State retirement ages, concern about delays in pension administration in France, or a wish to defer taking up one of the pensions.
Now, one of the key benefits of the coordination of pension claims is that insurance contribution periods are aggregated across each country, so that if you do not qualify for a pension in one country the periods of your contribution elsewhere in Europe can be taken into account so that you obtain sufficient years contribution in that country.
The calculation of entitlement is done on a pro-rata basis corresponding to the number of years of cover in each country.
Thus, if you had 25 years of insurance contributions in the UK and a separate 5 years in France, giving a total of 30 pensionable insurance years in Europe, the French tax authority would add the UK insurance period to the French one and then calculate your entitlement as:
- 100% French Pension X 5/30 = 16.6% French Pension
The result is that you will receive a higher French pension than you would if only the French contribution years had been used. The actual amount of your French pension would be based on the level of your pension contributions.
The same operation would be carried out by the UK pensions authority.
Each country remains responsible for the actual payment of the State pension; there is no consolidation of the pensions into a single pension payable by one country.
As each country has a different age of retirement you need to decide whether to take one pension or hold off until you reach the qualifying retirement age in each country. Taking one pension earlier might reduce the amount you receive in that pension. In order to assess the best route you would need to contact the pension authorities in the UK and France for assistance with a pensions calculation.
Taking a French pension does, however, pose a dilemma for some expatriates, as it would mean they would not be able to obtain an S1 certificate of health cover from the UK, which enables them escape the payment of social charges on the totality of their pension income, an issue we considered in our Newsletter article S1 Health Cover or French Pension?
Of course, it is likely to be only a short-term issue, as the British government will not go on indefinitely granting new S1 certificates to expats in Europe. Those with an S1 certificate at the time of exit will be protected, but for others it will depend on the outcome of the Brexit negotiations.
This article was featured in our Newsletter dated 08/09/2017