How worthwhile is a frozen UK state pension???!!!

[IloveJapan]

Hello guys, wishing everyone a Happy New Year!

Regarding the UK’s famous frozen pension, which unfortunately affects UK expatriates in many countries incl. Japan, I would like to ask a simple, naive question: Just how worthwhile is it contributing to such a pension? I am committed to living in Japan permanently.

I understand that most people on this site think it is worthwhile contributing, but is that so even if it is frozen??? I mean, the main purpose of such a pension should be to insure against longevity risk, and if people live 20-30 years after retiring, those payments will be greatly inflated away. And of course, predicting what will happen to the pound in future is Russian Roulette given Brexit.

I am in a dilemma myself, because I understand that pensions are important in old age. However, the information on the 2016 changes, that I found on government/financial sites, suggest they are a real game-changer. I have the impression that:
A) Pensions can no longer be inherited by spouses if you retire after a certain date
B) You can no longer have the deferral leading to lump sum option if you retire after 2016 (I mention the lump sum option because it would have been beneficial to use given the frozen pension issue)

Also, back around 2013 I think, changes were made so that spouses can no longer receive any pension based on your contributions. In other words, they must have contributed themselves. This is very bad news for foreign spouses that have not lived in the UK.

And other possible future changes, of course, include means testing.

So I would really like to know other peoples’ opinions about how worthwhile the UK state pension really is?

The other thing is, so many people when they apply to HMRC to set up these NI contributions, have to wait several months or longer. So that means that even if I applied now I would not be able to do the cheap Class 2 contributions?
And if people start contributions, are they allowed to stop or do they have to continue?
Also, I noticed the P38 form asks for past employment history. Is it just history for the past 3 years, or for all the time I have been in Japan? (I have been here for decades). And what sort of employment details are required, for that matter? The form looks very unclear on these issues, and even when I called HMRC to ask, I got a range of different answers depending on the person I spoke to!!!
Their call center appears set up to confuse people, not guide them!

I would welcome any feedback from you guys.

[RetireJapan]

Hi ILJ

Happy New Year to you too! Welcome to the forum.

Great question. Let me try and answer the bits I can:

1. The UK state pension for expats making voluntary contributions seems like a very good deal, particularly compared to the Japanese one.

Class 3 contributions are about 8750 yen a month (57 GBP)
Class 2 contributions are about 1750 yen a month (11.40 GBP)

In return the maximum state pension is about 98,000 yen a month (638.20 GBP)

The Japanese state pension is 16,490 yen a month, and the maximum payout is 65,008 yen a month.

2. Living in Japan we won't get cost of living increases (currently the 'triple lock')

Only people living in the following countries will see their pensions go up once they start receiving them: https://www.gov.uk/government/publicati ... te-pension

This is clearly not ideal, but I think there are two things that make up for it a bit: you may choose to return to the UK some day, in which case they update your payments to the current level, and Japan has recently had lower inflation than the UK.

3. Political risk (ie changes to the system)

We can't predict this, so I would basically ignore it.

4. Rules on spouses

I'm not 100% clear on this, so will have to look into it.

5. Dealing with pension office in the UK

This is terrible: confusing, frustrating, and time-consuming. The good news is that once you get things set up they seem to go quite smoothly, and you can monitor your account easily online: https://www.gov.uk/check-state-pension

In short, I think the UK state pension is a fantastic deal, even paying the higher class 3s as I do. If you can pay (and backpay) class 2s, it's a complete no-brainer.

Hope that helps!

[IloveJapan]

Dear founder,
Thank you so much for your prompt, detailed reply. Gives me food for thought.
Currencies, politics etc. are very hard to predict, I know, esp. since I don’t follow UK events hardly.

I was told I have 4 years of contributions or credits, but since I also went to University in the UK and left only months after graduating, I don’t know if I would qualify for class 2 or if it is too late anyway.

Anyway, thanks again.

If anyone knows about the remaining questions, pls. let me know, I’ll be grateful! And tell me about your experiences of applying!

[monchan]

Interesting little thread. I recently organized this myself and was luckily deemed to be Class 2 (lower contributions).
The process was pretty drawn out as HMRC (web and mail comms) and the gov.uk site is not particularly user friendly.
Essentially it boiled down to two simple steps:
1. read and fill out the CF83 form to determine what NI contributions you will qualify for (Class 2 vs Class 3)

The form is at the back of the below linked document.

https://www.gov.uk/government/publicati ... broad-ni38

2.You will then receive a letter (3-4 weeks later in my case) from an HRMC case officer informing of your status, based on the information you have provided. Try and be as complete with the information as possible! You can then make any shortfall contributions according to the Class you qualify for which will be listed in the letter you receive.

I have to say its not the smoothest of processes, and even when you set up a profile using your NI number on gov.uk its not all that clear. I've been told that any information related to your profile (in terms of ongoing contributions etc.) will always be quoted at the Class 3 rate. Which is totally unhelpful if you are Class 2! Which means you then have to manually work out your annual contribution, and process the payment.

But its a no brainer to keep paying NI contributions - the state pension is not going to be huge, but it's additional retirement money that you are entitled to. So claim it.

[Bushiman]

I was told I have 4 years of contributions or credits, but since I also went to University in the UK and left only months after graduating, I don’t know if I would qualify for class 2 or if it is too late anyway.

I'm in exactly the same boat... Did you manage to qualify for class 2?

[KyushuWoozy]

https://endfrozenpensions.org/

Sign the petition!

[ricardo]

I agree with the OP and am far from convinced that it’s a fantastic deal considering it’s frozen. A rough calculation over 20 years, assuming say 1% inflation in Japan (I suspect it will be higher in the future) shows how your pension goes down in real terms. Do you really want to be paying more into a fund which you know will go down - guaranteed?

The exchange rate risk is also a massive factor which can dramaticllay reduce the value of a pension paid in GBP. Who knows what will happen to it in the future.

My private U.K. pension is raised by inflation every year. Now that’s a fantastic deal, particularly considering the current low level of inflation in Japan. (Still same point about the exchange rate, though. Not much I can realistically do about that, except plan for a worst case rate and regard anything better as a bonus for discretionary spending).

I’ve signed the petition. Don’t hold your breath...

[RetireJapan]

Well, it only gets frozen when you start receiving it, so it should go up in the meantime (and you never know, you may end up back in the UK in retirement after all). For now the 'triple lock' is still in effect I believe.

[ricardo]

Good point. The triple lock is still in place. But the OP said he wasn’t ever going back to the U.K.

I still think that you’re buying something which is guaranteed to go down in real terms so you have to look at what it will be worth 20 years after drawing it and factor that into the calculation. I think it makes it much, much less of a good deal - although not necessarily a terrible one...

[RetireJapan]

Good point. The triple lock is still in place. But the OP said he wasn’t ever going back to the U.K.

I still think that you’re buying something which is guaranteed to go down in real terms so you have to look at what it will be worth 20 years after drawing it and factor that into the calculation. I think it makes it much, much less of a good deal - although not necessarily a terrible one...

The thing is, even for people like me paying the more expensive Class 3s, we will end up paying a total of about 15,000 pounds, and then receive a pension of about 8,000 pounds a year for life. Class 2s are such a good deal that if you are allowed to pay them and don't you deserve to have someone come round and punch you in the face every day. Even if it gets frozen, the exchange rate worsens, inflation in Japan takes off, etc. it is still likely to be worth it after just a few years*

* assuming no future government changes the rules drastically. But for a fraction of my portfolio it seems like a good diversifying bet.