Living Abroad when you retire?
Retiring abroad to a place in the sun is becoming a reality for an increasing number of people. Every year, more and more of us stop dreaming about leaving the UK behind and turn it into a reality. There are now over a million retired British people living overseas and this is forecast to rocket to 5 million by 2020.
Many people have held the dream of living overseas for much of their working life and as they approach retirement, with the right investment advice and proper pension planning, they can realise their dream of expatriate living.
Before you pack your bags…
But before you go putting your house on the market, sit tight for a while and have a really good think about what retiring abroad would mean for you and your family. Experts tend to suggest that you spend up to two years preparing for an overseas move.
We've addressed some of the typical questions we get asked by people considering spending their retirement years in the sun.
Do I want to retire abroad?
The first question to ask yourself is "Do I want to retire abroad?" Make sure you aren't just suffering from the Grass is Greener syndrome. You may have been on holiday somewhere and thought "this would be a nice place to retire" – but – hold on, think rationally about your holiday destination and instead try to look objectively at what it offers in terms of the basis for the next stage in your life. Would it make more sense to consider a second home in the UK? Try putting together a list of all the things you want from your new life abroad and think about what you'll miss when you leave the UK. Also, have a think about whether you want to leave for good, for a few years or even if you want to go in for what's known as 'seasonal retirement', where you buy an overseas property and spend the UK's long winter months abroad but come back in the summer.
According to Government statistics, there are currently over 55,000 British people receiving their State pension in Spain, 35,000 in Italy, 24,000 in France and 6,500 in Portugal. But please bear in mind that there could be significant financial and tax implications moving abroad. This is where Plan Your Retirement can help you.
How much will I have to retire on?
The next thing to do is to try to work out how much money you've got to finance your dream of living abroad. Spend some time calculating your pension income in retirement. Find out the current value of your pension contracts or annuities. As this area can be quite complicated, you should consider seeking retirement advice from Plan Your Retirement – again, this is an area where we can help you.
In terms of your UK State Pension, you can request a forecast telling you in today's money the amount you have earned and what you can expect to receive on retiring. You can do this by filling in form BR19 from your local social security office or by contacting the Retirement Pension Forecasting and Advice Unit (RPFA) on 0191 218 7585. You should also check the section on claiming your pension for details on how to receive both State and personal pensions abroad.
A couple of points to consider:
With the income from your pension paid in Sterling and your day-to-day living expenses adding up in a different currency, you'll find yourself at the mercy of currency fluctuations. At the moment, the Pound is strong against most other currencies; you'll get more for your money when you exchange it. But currencies are volatile and, during the course of your retirement, the situation could well move the other way. You need to try to factor this in when working out how much you've got to live on.
In the UK we've become used to living in a low inflation economy for such a long time that a lot of us have forgotten what problems high inflation can cause. While no-one can predict the future, it's wise to spend some time looking at the economic situation in the country you plan to move to.
Of course, you've got to take into consideration practicalities, such as whether you can afford the place or if, in fact, you're allowed to retire there. But with the enlargement of the European Union, the UK's currency going strong and such like, the world is your oyster. As an EU National, you have the right to live in any EU country.
Do your research
Perhaps you already know somewhere really well; you understand the culture, speak some of the language and feel happy about transporting yourself lock, stock and barrel to the region. If you do, you're lucky because that's a considerable chunk of the legwork done. For anybody else, this is the big one. And because it may be the rest of your life we're talking about, it is wise not to do anything rash.
Even if you've holidayed in the same spot for the last 20 years, don't rush into buying a home without doing some extensive research first. Living in a place is very different from being on holiday. The local, laid back attitude to life may seem quaint from your palm-fringed beach but once you're grappling with paying bills, visiting doctors or even trying to do something as simple as getting together the ingredients for your favourite recipe, the novelty could soon wear a little thin.
Many thriving holiday spots are ghost towns out of season so visiting at different times of the year could reveal a lot.
If you think you've found your own bit of heaven on earth, see if you can uncover what the planners are up to. Could a monstrous tower block soon be upstaging your sea view or are there plans afoot to transform the idyllic backwater you've set your heart on into the next must-go destination for hordes of marauding men on stag weekends?
Finding somewhere to live
Once you've settled on an area, you need to find out about the accommodation costs, as well as the cost of living. You can do a lot of the legwork over the Internet while you're still in the UK, but there's no substitute for visiting the place.
And if you've just discovered a hidden treasure with a rock-bottom price tag, refrain from whooping for joy for a moment. You still need to unearth the hidden extras. We may all grumble about the cost of moving house in the UK, but in other parts of the world the route to home ownership can be equally, if not more, treacherous. Some of the things to watch out for include the following if you're thinking of buying abroad:
VAT – we currently don't have VAT on property in the UK but it crops up elsewhere in Europe.
Capital Gains Tax (CGT) – in lots of countries you'll get clobbered, even if your property is your only home.
Next add estate agent fees, land tax and the cost of the notary.
Remember to hire a bilingual lawyer.
Think exchange rates – in the months that it takes to buy the average property, fluctuating exchange rates could add thousands to the price of your home.
What about the home you're leaving behind in the UK?
Have you considered what you're going to do with the home you currently live in? Sell up, rent out or leave empty for visits? Each option has its pros and cons.
Selling means burning bridges – with the UK property market still jet-propelled, you may be priced out of the market if you decide to return home at a later stage.
Renting out means dealing with tenants, taking out landlord's insurance, estate agents fees and tax on income – plus, you'll need a pot of cash to cover times when your home is between tenants or if it needs repairs. You will also need to consider any potential UK Capital Gains Tax implications of having a second home.
If you decide to hang on to your home and leave it empty, then check out your insurance cover. Buildings insurance should go on as usual but most contents insurance is void if you leave your home empty for a prolonged period of time. You'll also have to work out how to pay for utilities and find someone to keep an eye on it for you.
The practicalities of living abroad
Because we're talking about retirement abroad, it's essential to dwell for a while on the practicalities of your dream home. Try to think ahead and to anticipate how your life could change further on into retirement.
A third floor apartment with knockout views maybe great now but further down the line are you really going to be able to cope with all the stairs? The same goes for that to-die-for cottage perched on an outcrop overlooking a winding Spanish hilltop village.
What local transport is like if you decide to give up your car one day? And how about amenities and medical care?
Another point to consider is whether your family will be able to afford to visit you or if you could find the cash to return to the UK if you needed to. Europe, with its low cost airlines (at the moment) is one thing but if you're harbouring an Antipodean retirement dream, this is in a different league altogether.
Claiming your pension overseas
The good news is that there's nothing to stop you claiming your State pension while living abroad. In fact, around one million UK pensioners are already doing this. You can opt to have it paid into UK bank account or if it's more convenient, directly into a local bank account in your newly adopted country.
Watch out though, because not everybody automatically gets the extra cash when the State pension rises. To qualify you have to live in the European Economic Area or in one of the countries with which the UK has a reciprocal social security agreement.
The Department for Work and Pensions (DWP) has leaflets detailing the ins and outs of the reciprocal social security (please refer to our Links page).
Personal and Company Pensions
As for other pensions, it would be wise to find yourself a good independent financial adviser (such as Plan Your Retirement, of course) who can explain all about paying your pension in your new home country. You'll need to find out if your Company pension scheme has to be paid into a UK bank account, or if your annuity company charges hefty fees for transferring money overseas.
As your pension is likely to be in Sterling, you should also spend some time talking to your financial adviser about how to minimise the impact of exchange rate fluctuations. Plan Your Retirement can provide you with this information.
Understanding the tax situation
Your relationship with the UK taxman won't cease the moment you leave British airspace. If you don't want to end up paying tax all round, this is an area of planning that you'd be wise to pay particular attention to.
To make matters worse, there's no easy formula to work out what you'll have to pay. Expatriate tax is notoriously complicated and definitely an area where a financial adviser could save you big bucks in the long run. It's also an area so extensive that we could easily fill up an entire website going into the details. But, to give you a few pointers:
The amount of tax you pay depends upon your tax status. On the whole, you'll continue to pay UK taxes as normal if HMRC considers you to be a UK resident.
If you gain non-resident tax status, you'll be exempt from certain UK taxes but others will still apply so check with your financial adviser.
The UK's tax year runs from 6th April to 5th April so the time of year you move may influence your tax status.
Overseas tax laws vary from country to country so you'll need to get to grips with the intricacies of the laws governing your new home.
If you have an income in one country but are resident in another, you may be liable to pay tax in both countries. To prevent this double whammy, the UK has negotiated double taxation agreements with many countries. This list is extensive, covering countries form Azerbaijan to Zimbabwe but if you want to double check, contact Plan Your Retirement or HMRC.
Offshore doesn't mean tax-free; it's just a way that can help minimise the amount of tax you have to pay.
Know your tax status
You are regarded as resident in the UK if you spend 183 days or more in the UK during a tax year.
If you're planning to spend a year in Provence but the rest of your retirement in the UK then you'll be considered ordinarily resident but resident for a tax year.
What about Inheritance Tax and Capital Gains Tax?
Your liability for Inheritance Tax is another area that it would be wiser to get professional advice on and Plan Your Retirement can help you with this. Again, you may have left the UK but this doesn't necessarily mean you've removed the need for your estate to pay Inheritance Tax. If you are domiciled overseas, you'll only pay UK Inheritance Tax on your assets in the UK but you need to look into local inheritance tax laws in your new country.
Capital Gains Tax varies from one country to another and this is another area where Plan Your Retirement can offer assistance.
What does 'domicile' mean?
You can be resident in two countries at the same time. But domicile is different from both your nationality and your country of birth. HMRC tends to consider you are domiciled in the country of your permanent home but if you have moved abroad, your domicile doesn't automatically change. You need to acquire a 'domicile of choice' and to do this, you have to break all ties with the country you are moving from – just living in a different country isn't enough. It's also worth noting that if you die within three years of leaving the UK, HMRC will automatically consider you domiciled in the UK.
Savings and investments
If you've managed to build up a portfolio of savings and investments then moving overseas could well mean rearranging it to work best for your new lifestyle.
It's not just tycoons who move money offshore. Once you're no longer resident in the UK, different taxation rules apply. These vary depending upon the country to which you have moved but it is likely that an offshore bank account or investment could help you keep your tax bill down.
Most UK banks have offshore divisions so you opt for an account with one of these you'll have the comfort of dealing with English-speaking professionals who understand the needs of retired ex-pats. But be aware; even though you've moved your money offshore you'll still have to pay some sort of tax and the charges on offshore accounts can be astronomical.
Offshore investments may be a tax efficient option whether saving to move abroad or already resident outside the UK.
Making a Will
If you die without a Will in the UK you can leave your loved ones with sorts of problems, but bow out while overseas and life could be a nightmare for those left to unravel your estate. And don't think that just because you've got a Will in the UK you're sorted. Unfortunately every country has a host of weird and wonderful laws governing what you can do with your assets. So you'll need to check this out and perhaps make another Will to cover anything you've accumulated in your new home country.
Some European countries don't allow you to leave your home to your spouse alone. Instead, you have to share it out with your kids too. Writing a will doesn't change this so it's definitely something to bear in mind if you've got a collection of offspring from previous relationships. You may be able to use your will to give your spouse the right to live in the property until they die.
Health and welfare
The quality and cost of medical treatment is definitely one to get sorted before you set foot in your new country. Is the local system capable of meeting your needs as your grow older and are you, in fact, eligible to use the services it provides?
If you move to an EEA country, once you're receiving your State pension, you are entitled to use the health service on the same basis as local pensioners – but this doesn't necessarily mean free because in many countries you have to pay some or all of the cost of medical treatment yourself. Outside these countries you won't be entitled to anything for free so private healthcare is a must to consider.
A comprehensive private health insurance policy can cost over £3,000 for a couple living in Europe; in the USA and Canada you're looking at up to £10,000 a year.
Typing up the loose ends before you go
Go for a check up with your doctor before you leave and arrange to get copies of your medical records so they can be passed on to your new overseas doctor.
Have any vaccinations that you might need to stay healthy in your new country and make sure you're up to date with boosters such as tetanus and polio.
Decide what to do with your car. If you take it with you, you're likely to need to register it and take out local insurance and taxation, although there are UK-based insurers who can offer you a combined combined car and property insurance policy. Also, look into the costs associated with exporting it because if you've got to pay hefty duties it could well be more cost effective to sell it and buy a new one overseas. And remember that if you do decide to take your car with you, it is likely to be at odds with your new country's road systems because, of course, in most other parts of the world, people drive on the right.
And last but not least, what about Tiddles? Remember to incorporate your pets into your emigration plans because exporting animals isn't always straightforward. Regulations vary form country to country but you may require an import permit, proof that vaccinations are up to date or an Export Health Certificate. If you're flying, you'll also need to book a space for your pet. And be aware that cheap airlines don't carry animals, so your pet's ticket could well end up costing more than yours.
What to do when you arrive
Register with the local authorities. If you've moved to an EEA country, you have to apply for a residence permit within three months of arrival.
Register with the British Consulate.
Open a local bank account so you can pay bills and receive your pension or income from any investments you may have.
Check local driving rules and regulations. You may need to apply for a local driving licence or, horror of horrors, retake your driving test.
Enrol in a language course.
What's new? Phased Retirement for anyone (2016)
Phased retirement was introduced to add flexibility to drawing benefits from a personal pension. Basically, it divides your pension fund into one thousand little policies allowing you to draw the combination of tax-free cash and annuity income from each one separately. The concept is to encash (vest) the exact number of plans each year to meet a target income.
As most of the cash released comes from the tax-free cash element of the policy initially there is very little tax liability in the early years. Over the years the annuity element will rise and eventually this will provide the majority of the income.
The main advantages of the system is that it allows you to adjust your income levels at will in the early years and to leave most of the fund invested whilst drawing an income. Annuity purchase is thus delayed and spread over a number of years rather than taking place all at once. The concept is very flexible but the main disadvantage is that most of the tax-free cash is used to provide income and cannot be drawn as a lump sum.
These days phased plans are often combined with income drawdown to give the greatest possible flexibility but the administration of these plans can be complex. At age 75 any remaining funds that have not been vested must then buy their annuity (or tax-free cash.). Phased Retirement -
Frugal & Economic Lifestyle
Inheritance Tax Planning
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