UK State Pension from Japan
A surprisingly good deal?
This post is for UK nationals only, I'm afraid :)
Recently I've been reading about the UK social security system, particularly the New State Pension.
This is thanks to Gareth S., who I owe an apology to: he tried to tell me about this several times, and I didn't listen because I was stubbornly clinging to my assumptions. Something must have sunk in though, as it got me going in search of more info.
This leaflet explains the State Pension.
This leaflet explains social security abroad.
In short, you can pay voluntary contributions (currently £14.10 per week) towards the UK state pension. If you pay in for ten full years you will be eligible to receive a state pension on reaching retirement age. The state pension is currently (£4.45 x # of years, maximum £155.65) per week.
So if you paid in for ten years, you would receive £44.50 per week under the current system.
To get the full pension you would have to pay in for 35 years.
This is a surprisingly good deal, and is basically an unbelievably favourable annuity. The real benefit is a kind of longevity insurance. Because you will receive the pension for as long as you live, it protects you from running out of money if you live 'too long'.
If you buy an annuity from an insurance company, the best rates are currently around 4%. In contrast, paying into the UK state pension gives you a rate of over 30%.
If you have already paid into the UK scheme, it is pretty much a no-brainer to continue paying in voluntarily to boost your pension. Even if you have never paid in, like me, it may be be worth doing so to diversify your retirement income and lock in an extremely cheap annuity.
Of course, all of this depends on whether the UK state pension scheme will continue operating in its current form, whether the rules will change in a significant way, whether the pound is worth anything in the future, and a host of other assumptions.
And there might be another benefit. Japan expects residents to declare all worldwide income and pay taxes on it. There are harsh penalties for not reporting overseas assets over 50 million yen in total. Paying into the UK pension system is one way to invest abroad without falling foul of either of these.
What do you think? Great deal or not worth it?
This post first ran on RetireJapan in November 2016