Could Brexit scupper your overseas retirement plans?

For example, within hours of the vote we saw a significant fall in the value of sterling, which has had an immediate impact on the value of pensions of those living in the eurozone and further afield.

A particular group who now face uncertainty is those who are receiving a national insurance-based state pension from the UK government but who are living in another EU member state.

The main uncertainty relates to whether state pensions in payment will continue to benefit from annual upratings. As at September 2014 there were 1.24 million people receiving British state pensions but living outside the country.

Frozen pensions

Nearly half of these (around 560,000) live in countries such as Australia, New Zealand, Canada and South Africa, where their state pension is frozen at the rate it was when they left the UK.

The big question is whether British expats living in EU countries such as Spain could find themselves in the same position.

The issue of frozen pensions has a long and complex history, with its origins in the creation of the national insurance system after the Second World War. When the new pension was introduced, it was not payable at all to those living abroad.

In 1955 the rules were changed to allow pensions to be paid worldwide, but there was no mention of annual upratings. However, it would be fair to say that inflation was much lower in those days and, even in the UK, pension increases were by no means an automatic annual event.

Between the creation of the new pension system and 1973, around 30 country-by-country deals (known as reciprocal arrangements) were struck, which allowed for annual increases to be paid in certain countries.

This was mainly done in the context of trying to make it easier for people to move freely between countries during their working life without suffering penalties in retirement for doing so.

But very few new deals were done after this date, not least because double-digit inflation meant that it was becoming increasingly expensive to uprate pensions.


Pension upratings

The current situation is that pensioners living in the EU, other EEA countries such as Norway, Iceland and Liechtenstein, and also in Sweden can receive upratings, but there is no guarantee that these arrangements will continue following Brexit.

There will be a temptation for the UK government to save money by ending the uprating of state pensions to those living elsewhere in the EU.

For example, the estimated saving from the existing 'freezing' of pensions is around half a billion pounds a year, and freezing pensions in the EU could easily double the savings from this policy.

With less than 100 overseas voters still on the UK electoral register in a typical parliamentary constituency, the government might judge that the political impact of such a move would be modest.

However, it is fair to assume that the hundreds of thousands of expat pensioners affected might mobilise their friends and family living in the UK, as well as getting themselves back on to the UK electoral register where possible.

Such a move might also be very unpopular with those currently in the UK who were planning at some stage to retire to the EU.

Uncertain situation

Another reason for the government to think twice would be the potential for large numbers of pensioners living in the EU to return to the UK.

Whilst the UK government has in the past been sceptical of this argument for those living in Australia, many of whom emigrated decades ago for work reasons and are now well established in their new country, the case would be much more credible in respect of British pensioners who retired to the EU after they stopped working.

If state pensions were frozen and access to healthcare in the host country was also more constrained, the UK government could find itself with large numbers of returning pensioners, which is a situation it would want to avoid.

In sum, the situation remains uncertain, and this is one of many issues which will need to be resolved over the coming years.

There is no guarantee that future state pension increases will be paid, but there will be considerable political and practical pressure on the government to find a way to preserve the existing system.

Steve Webb is director of policy at Royal London.

This article was originally written for our sister magazine, Money Observer.

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