Combine state pensions or transfer UK funds
If you are a foreign resident who has paid into a state pension in one or more EU countries, it is possible to combine your state pensions. For those from outside the EU this may also be possible if there is a bilateral agreement with your home country. UK pension holders can also consider QROPS to transfer their pension pot.
For details on how the Luxembourgish pension system works, read our article here.
State pension - EU member states
If you worked in more than one EU country and paid taxes locally, you may have accumulated pensions rights.
Where should you apply for your pension?
The general rule is that you should apply to the pension authority in the country you are living in when you retire or the country you last worked. This country will be responsible for processing your claim, based on the records of contributions from all the countries that you have worked in.
Be aware that each EU country has different retirement ages, so you may receive your accumulated pension rights only when you’ve reached the legal age of retirement in the country you made your contributions.
The EU website gives the example of Caroline, who worked in Denmark for 15 years before returning to her home country of France at the age of 60 years. She only received the smaller, French portion of her pension until the age of 67 years, the legal retirement age in Denmark.
You should also check a country’s minimum period of work and contributions (so in Luxembourg 120 months) for eligibility to a state pension. However, the pension authority you’ve have applied to must take into account all periods worked in other EU countries. Again an example is given:
Tom worked for 4 years in Germany but 32 years in Portugal. To qualify for a state pension in Germany he should have worked for five years. However, because he worked 32 years in Portugal, the pension authority will recognise his four years of work in Germany and this will be accounted for in the final calculation of his pension.
How your pension is calculated
Each pension authority in the countries that you have worked and made public pension contributions (so not any private pension or company scheme) will calculate the part of the pension it should pay taking into account periods in different countries. They will look at the contributions you have paid into their system and what you’ve paid into other countries and for how long you worked in each country.
EU equivalent rate
Each pension authority will calculate the part of the pension it should pay taking into account all the periods you worked and contributed in EU countries. Usually this is done by adding together all the periods and working out your pension had you contributed over the entire time you worked.
This theoretical amount is then adjusted pro-rata against the actual time you worked and were covered or contributed. If you meet conditions for entitlement to a national pension irrespective of periods completed in other countries, the pension authority will also calculate the national pension (known as an independent benefit). You will receive either the pro-rata benefit or independent one, whichever is higher, from that EU country.
You will then receive a P1 form explaining each country’s decision on your claim. The following example is given:
Rosa worked for 20 years in France and 10 years in Spain. Both countries apply a minimum period of 15 years of work in order to have the right to a pension. The French authority calculate that Rosa’s national pension would be €800 and the theoretical amount pro-rata which would be €1,000. Rosa will be entitled to the higher amount.
The Spanish authority cannot calculate a national pension since Rosa has not worked long enough in the country. Instead it will calculate her pension by taking a theoretical period of 30 years which would qualify her for a monthly payment of €1,200 and then multiply this figure by 10 and divide it by the 30 years to get a pro-rata pension of €400. Combined, Rosa will receive a pension of €1,400.
Who pays your pension?
Each country that grants you a pension will contribute the amount calculated into the bank account of your country of residence, so long as you live in the EU. If you don’t, then you might need to open an account in each country in which you are claiming a pension.
Bilateral agreements outside the EU
Your country of nationality, or a country you worked in that is outside the EU, may have a bilateral agreement with Luxembourg on pensions and social security contributions. American citizens can review the bilateral agreement and how it impacts social security payments and pensions here. More than 15 other countries have bilateral agreements with Luxembourg. You can find more information from CNAP here.
QROPS for UK pensions
A Qualifying Recognised Overseas Pension Scheme allows EU residents to transfer UK pension funds tax-free, so long as they don’t exceed the UK’s lifetime allowance (currently at just over £1 million), and the QROPS is based in the EU/EEA (European Economic Area). If you have more than £1 million in pension funds or want to transfer to a QROPS outside of EEA, HMRC would apply a 25% transfer charge on the entire amount.
The advantages of transferring include the ability to consolidate your pension into one scheme and one currency, and could decrease your tax liabilities, particularly if you die outside the UK and want to pass your pension assets on to your non-UK resident heirs.
However QROPS are not suitable for everyone, schemes charge set up costs and fees, and to ensure a tax-free transfer, schemes must meet certain criteria to remain on the HMRC approved list.
One incentive being touted by QROPS sellers is that there is no guarantee the tax-free transfer within the EEA will continue after Brexit.
Online advice is to check with a qualified financial advisor and make sure the scheme you choose is listed on the HMRC website as a QROPS, as not all schemes are approved. It’s worth checking if the value of your fund is worth transferring too.
For more information, read the FT Adviser article on Understanding QROPS and transfers from UK pensions.