Pay attention to your pension before retiring to the sun

April 2nd, 2007

Over one million Brits are currently receiving their pension abroad and this is expected to more than triple to 3.3 million by 2050.

At present, three quarters (75,000) of those drawing their state pension abroad have relocated to sunny Spain. With this trend looking set to continue, Bank of Scotland International takes at look a drawing your pension in Spain.

Spain continues to be the most popular destination for Brits buying property overseas as it currently hosts 27% of all Briton’s second homes abroad. However, when retiring to the country’s sandy beaches, there are a number of factors to consider, the most prominent of which should be ensuring that all your finances are in order.

British Expatriates are entitled to receive both state and personal pensions when moving to Spain and state pensions drawn in Spain will continue to rise in line with inflation. However, you are only permitted to collect a state pension abroad if you have paid the requisite National Insurance Contributions over the years. It is also important to remember that any pension benefits you are entitled to in the UK may be affected by your move to Spain.

For those planning to live abroad for less than two years, another option is to arrange for your pension to accumulate, providing you with a lump sum upon your return to the UK.

Bank of Scotland International recommends that anyone planning to retire to Spain take the following issues into consideration:

Pension payments – Set up an account which allows you to receive your pension whilst also facilitating international banking.

Additional pension benefits – Any pension benefits that you receive in the UK may be affected by your move to Spain. For example, you will no longer continue to receive pension credits if you are living in Spain, although you may be able to continue to claim certain other benefits. Please refer to the Department For Work and Pensions’ (DWP) GL29 guide: Going Abroad and Social Security Benefits for additional information.

Contact the relevant Government Departments – It is essential to contact your Social Security Office, the DWP and the National Insurance Contributions Office so that they know you are moving to Spain and you continue to receive your pension.

Look into your tax status – You need to understand your tax status and how much tax you will pay on income received over your UK personal allowance. The IR20 guide from HM Customs and Revenue is a good source of information regarding this.

Understand your tax liability – People taking early retirement and moving to Spain before they are eligible to draw their pension will need to pay particular attention to the 25% tax-free rule. Currently, only those people resident in the UK are able to take 25% of their pension lump sum tax free. If you are liable for tax in Spain before you start drawing your pension, you may find that this 25% is taxable as well.

Evaluate the currency risk – You should consider the currency risk when living in Spain and spending Euros whilst drawing a pension in Pounds Sterling.

Tony Wilcox, managing director of Bank of Scotland International, said: “For many people, moving abroad is a very exciting time, but it is important to have adequate financial planning in place. Ensuring that you have made arrangements regarding your pension before leaving the UK can avoid a considerable amount of hassle at a later date.”

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