Buying additional years

Laikos

Thanks pinkks, that's one thing I'm not clear on. Am I able to get two countries' pensions for the same period (having paid into both obv.)?

pinnks

Yes.  Each country does 2 calculations and pays you the higher amount of:
1. the amount you would get based on your contributions to their system and any credits etc they give.  If they have a minimum years requirement  like out 10 years, then this may mean £/€ 0.

2. a theoretical amount assuming all of your contributions/credits were in their country, but counting overlapping periods only once.  This theoretical amount is then pro-rated based on your contribution record in their country.

So, if you had 5 UK years and 40 German years, you would get nothing under 1. as the UK requires 10 years but under 2. you get the max 35 years and so a theoretical amount of 35/35 x £max, which is then pro-rated to 5/35 x £max.

In some countries, e.g. Germany, the way their rules work, especially for unemployment credits or other credits, you can end up with an amount under 2. higher than 1. even if you meet the minimum years requirement under both.  It is what it is.  

Anyway, each country then pays you a pension based on their application of the above.  You then need to look at the double taxation treaty to establish where each pension will be taxed.  Again, looking at the German/UK treaty, the state pension (social security pension) is taxed in the paying country, whereas for Italy and Spain and many others it is taxed in the country of receipt.
  

Suhusa

There's actually a fine difference there - in the UK-German agreement it says the state pension is taxed in the paying country unless it's effectively untaxed there and in that case it'll be taxed in the country of residence. Which means that UK state pensions are generally taxed in Germany when you live there (they're under the tax threshold in the UK, so not taxed in the UK, so Germany will tax them if you're a German resident because they're definitely above the German tax threshold if they're anywhere near a full pension), and that German pensions are likely to be taxed in Germany as well (if they are above the German tax threshold - but because that's lower than the UK threshold the UK won't tax a pension that's not been taxed in Germany). Essentially Germany really wants those taxes. This is obviously only the case when other factors like a private or workplace pension don't come into play because that'll likely lift you above either tax threshold.

pinnks

Sorry but that is not correct. 

Effectively taxed means "subject to tax", which the UK state pension is, in the UK.  The fact they it is covered by an allowance does not mean it is not effectively taxed.  There is plenty of case law on that.  Not being effectively taxed would be interest on an ISA which is tax exempt, or the 25% tax-free lump sum on UK workplace pensions, which is also exempt.  Indeed the latter causes many Brits living in Germany a real headache!

However, UK income (whether a state pension or a Government Service pension like a Civil Service or military pension) that is not taxable in Germany is subject to Progressionsvorbehalt in S32b EStG, and is thus used in setting the rate at which tax is payable on the income that is taxable in Germany.  This is provided for in Article 23(1)(d) of the DTA.  Many people confuse the two, which is perhaps understandable given that the UK has no equivalent.

Also, irrespective of your level of UK taxable income, the German state pension is not taxable, or taxed in the UK. Indeed, it does not need to be entered on the UK tax return, other than a note in the notes space in accordance with the guidance in SA106 to say "I receive a German state social security pension from Deutsche Rentenversicherung Bund, paid via the German Post's Renten Service, which shall be taxable only in Germany under Article 17(2) of the UK/Germany Double Taxation Agreement. The pension has been in payment since XXXX. This statement is made in accordance with SA106 foreign notes, which explain on page FN8 that if you have a pension that is not taxable in the UK because of a DTA, give full details of the pension's payer, pension and relevant DTA in the Any other information box on your tax return."

My wife and I are in receipt of German state pensions and one of us has other UK income below the UK Personal Allowance, which, based on what you say, would mean the UK would seek to tax the German pension and that is not the case.
  

Suhusa

@pinnks The way you explain it actually makes more sense. I was only repeating what I was told (i.e. 'if you don't take tax for it we tax it') but it makes more sense if it involves the Progressionsvorbehalt. Maybe the explanation I got was supposed to avoid confusing me by avoiding an explanation of how the Progressionsvorbehalt works, which made it actually more confusing. Who knows. In retrospect it is weird that the Progressionsvorbehalt wasn't mentioned (particularly given that I was subject to it when I moved back to Germany so there's really no need to spare my feelings or indeed brain cells by avoiding mentioning it).

But then when I moved to the UK and asked about stuff like tax residency or switching from German health insurance to the NHS I was given the information relevant to a posting or an Erasmus year instead of moving to the UK properly (despite specifically asking about it wrt to emigrating instead of being posted - I suppose it's because people are more familiar with Erasmus and postings and don't realise that proper emigration works differently). So I don't know why I was so trusting given those experiences...

pinnks

Life can be so complicated! 

The effectively taxed point is mentioned specifically in Article 17(3) which flips taxing rights back to the paying country where the person has paid into the pension for 15+ year, got tax relief on those payments and not had it clawed back as long as it is then effectively taxed in the paying country but is not even mentioned in relation to Article 17(2) for state pensions.  There is, however, a slightly more generic reference to it in Article 23(1)(a).  But either way, the meaning is the same...

Laikos

thanks @pinnks I'll leave the finer points of German pensions law to you guys! But what I think you are saying on your point 2 is that if I contribute to two countries' pensions I'll only actually get a pension from one of them for that period? For example, say I worked for four years abroad if I were then to also buy additional years to cover that period for the UK state pension I wouldn't get any benefit (subject to having a sufficient no. of years in both countries). That would seem to suggest I shouldn't buy those previous years (unless I'm concerned I'm not going to get enough to qualify for the second country's pension)? Is it not possible to get a UK pension for one set of years and a second country one for the other relevant years?

pinnks

No, that isn't what I was trying to convey.

If you are working in a country you generally have to pay into their state pension (social security) system and, if not working for any reason, you can often pay voluntarily or get credits.  Whatever you pay into the system for a particular country will count towards the pension in that country but if you have not been there for long you may fall foul of minimum period rules.

The aggregation/pro-rata rules in the EU rules on the coordination of social security systems (EC 883/2004) are designed to ensure that people are not disadvantaged if they exercise their EU rights and freedoms (the UK is still party to those rules for those covered by the Withdrawal Agreement and under the Trade Coordination Agreement for at least the next 15 years. 

When you come to claim your pension(s), which you do via the pension authority in your country of residence for all EU pensions (they then send all relevant info to all relevant countries based on a form that is called CFN901 in the UK), each country does 2 calculations and pays the higher amount as your pension as noted in 1 and 2 in my earlier post.  So, the minimum amount you can get is the same as a person with the exact same domestic record would get if they had not moved around Europe.  If you buy voluntary UK years they count towards your UK pension and feed into part 2 of any other EU countries in which you have contributed.

When years are aggregated for part 2 of the calculations, the pension authority adds all your NI records together.  Where a period in, say, the UK, overlaps with a period in, say, Germany, then priority is given to the domestic period and the "foreign" overlapping period is not used.  Add to this that some countries work in days, some in weeks and the UK in full years and it gets complicated to get your head round!

Anyway, if you lived in the UK until you were 21, in, say, July of a year, you would probably have full years from NI credits or payments for the tax year in which you turned 16 until 5 April before you left the UK.  You would also have an NI record from 6 April to, say, 1 July as the UK system is based on weeks even though only full years are counted for our pension.  Let's say you also buy 1 UK year (to keep it simpler!) at some point in the future, while contributing in Germany, thus generating an overlap with your German contributions.

Your German record would of course start from that July when you arrived and continue until you claim your pension.  Germany uses months, not days or weeks, but a single day in a month makes that month count - yeah, I know, it's complicated!

When Germany does its aggregation in part 2, it will literally list your UK weeks (converted ultimately to months based on the days of those weeks falling in various months), then your German months and then that future NI year you buy (52 or 53 weeks) and then more German months and so on.  Where a UK week overlaps with a German month, they identify it and exclude it.  You then end up with a contiguous, gapless, record from when your UK record started until you reach pension age in Germany and that contiguous record feeds into calculation 2.  The German system is earnings-related, so they take your months and your earnings factors and deemed earnings for periods of credits and crunch out a pension.  This number if then pro-rated back to your actual German months and compared with the number falling out of the part 1 calculation.

So, you get full credit in the UK for all of your UK NI years on your record, irrespective of how they were accrued.  You also get full credit for all of your German years on your German record but in addition, the UK applies the EU rules if you have less than 10 UK years and Germany applies those rules come what may (our system is not earnings-related, so there is no point aggregating if you have more than 10 UK years) and another number pops out of part 2.  You get the higher amount, so it's a win/win situation.

Is this making any sense???

Suhusa

I'd like to add that for the aggregation at least Germany seems to disregard voluntary contributions into the German system if UK years with contributions from working are present at the same time. When I had my calculations done (which in Germany you're asked to do when you're 40 at the latest) my pension forecast increased by well over a thousand pounds compared to the previous one which just had my (German) voluntary contributions.

Personally, I plan on paying Class 2 contributions till I have a full UK pension because that gives me two pensions almost for the price of one.

pinnks

The reason for that will not be because domestic contributions are disregarded but because of how the average earnings factors are affected by periods of German "credits" for unemployment etc when that is extrapolated in the 2nd part of the EU calculation (zwischenstaatliche Berechnung on your German statement). 

This played out to the benefit of my wife when she claimed her German pension as the zwischenstaatliche Berechnung (Pro-rata benefit) was nearly 20% higher than the innerstaatliche Berechnung (Independent benefit) based solely on German contribution periods.  For me, without any breaks in employment after uni, both calculations yielded the same, much as they do for the UK state pension in every case.

Interestingly, my wife paid a voluntary UK year after she had started drawing her German pension.  About 6 months of that UK year fed into the German calculation and further increased her pension by about 50 Cents per month, which was backdated to the original date of claim.  Not a lot but you can see how, with the German system, the EU rules can have a bigger impact than aggregation alone.