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June 13, 2016

Retirees Dilemma on Frozen Pensions Policy

Retiring to a beautiful home in the Caribbean’s or any other country in the world out of Europe could be a welcome idea to most civil servants living in Britain. However, the luxury of enjoying the cool breeze from the Table Mountains in South Africa or the calmness of the Canadian upcountry may not be easily achieved without digging deeper into your pocket. Thanks to the frozen pensions policy in the UK; all senior citizens who choose to retire and go live outside the UK and a few select countries in Europe and other parts of the world are condemned to a fixed pension payment. 

The frozen pension policy fixes your pension payments to the amount determined at the time you move into that other country other than the ones in the short list of select countries where the policy does not apply. This simply means that your pension payment will never be adjusted for inflation changes and you shall receive be receiving the same amount of pension payment for the rest of your life regardless of increasing costs of living till you die. Currently, there are cases of pensioners living in Canada who receive pension payments of about forty eight pounds a week. Worse still, there is a case of one pensioner who died early this year who was receiving about six pounds per week as her pension payment from the UK government!

A closer look into the frozen pension policy reveals huge anomalies in the way it creates inequalities among formerly equal level employees who decide to retire to different countries. If for instance two army officers retired today; one chooses to live in the UK after the retirement and the other chooses to go live in South Africa, the two will start at the same pension payment amount. However, over time, the pension payment for the retired army officer in the UK will be adjusted upward to account for a rise in inflation and hence the resultant increases in the cost of living. For the army officer who chooses to retire to South Africa, his pension plan will be frozen at the level at which it was when they decided to relocate to South Africa.

In about ten years’ time, the pension payment for the army back in the UK will have grown exponentially due to the compounding effect of the additional inflation adjustments. On the other hand, the army officer in South Africa will still be receiving the same meagre pension payment amount that he started receiving ten years ago after deciding to relocate to South Africa. With changing lifestyles, old age diseases and increasing money requirement to take care of growing monthly bills, the retired army officer will definitely find himself between a rock and hard place once his bills shoot above his savings and retirement benefits.

Due to the above discrepancies, most retirees prefer staying back in the UK or moving to the few select countries within Europe and the US where the frozen policy does not apply. This helps them ensure that their incomes during their sunset years are able to cover all their minimum requirements of life when they are not involved in any income generating activities. The fact that their pension payments are adjusted for inflation ensures that they are able to match them with the increasing cost of living over the years.

However, not everyone wants to retire and live in the UK. Some retirees want to travel the world and have a different experience in other countries. In the light of the frozen pensions policy however, it would make more sense for them to stay back home in the UK or within the European Union in order to be protected financially. They could then make vocational trips to their destinations of choice and come back home after touring the world for a while. For instance if they prefer to go to South Africa which is one of the many countries under the frozen pension policy; the retirees could use international money transfer to South Africa for the period they stay there to receive their pension payments.

Travelling to the EU countries or even retiring to any of them has been easier and the benefits of and adjusted pension payment for inflation applies. The fear of facing frozen pension policy has not been there before; but things might take a different turn if Brexit is voted in. Currently, the UK has about 472,000 retirees living in other countries in the EU who enjoy the adjustable pension payments. If the UK was to exit the EU, most likely the frozen pension policy would be extended to the EU countries where these retirees live and that would mean their incomes would become fixed and not adjustable to account for increasing living standards. This would then result to many of these retirees coming back home to the UK where they are assured of an increasing retirement benefit package.

Whether the frozen pension policy will influence the Brexit decision is not yet known. However, that notwithstanding, it is still very ridiculous that a retiree’s pension benefits could be varied based on where they are living in the World today!

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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