Beware the Financial Risks of Retiring Abroad
August 20th, 2010
Britons are the least likely to retire at home, according to a new survey revealing that more than half of us plan to desert the UK in favour of a sunnier climate. Better weather and a fiesta lifestyle have obvious appeal, but does this come with any nasty surprises?
Only 43 per cent of Britons see the UK as their preferred retirement location, according to Aon Consulting’s survey of more than 7,500 European workers. In contrast, the vast majority of Spanish workers, 87 per cent, intend to retire in their home country, followed by 81 per cent of French workers. Spain is a firm favourite for British retirees with almost one in four picking it as their preferred retirement destination. In second place came the US, with Australasia and France filling the next two places.
“Not surprisingly, most people want to spend their retirement predominantly in countries with good weather and good social and government benefits, and ideally close enough so they can get home quickly if they need to,” says Oliver Rowlands, head of retirement at Aon Consulting.
While the benefits of retiring in another country often speak for themselves, the dangers may not be so obvious. In some instances, many living costs will be lower but these savings can quickly be swamped by increased healthcare costs and unexpected tax bills. One of the biggest challenges British expats face is currency exchange. If the main source of your income is in sterling, its strength, or lack of it, will have a big impact on your standard of living.
“Expats in Spain, thanks mainly to the weakness in sterling against the euro but also the relatively high rate of inflation there, lost a third of their income in 18 months recently,” says Steve Laird from independent financial adviser (IFA) Carrington Wealth Management. When transferring assets it may be worth considering leaving money in the UK, then using a forward contract from a specialist currency broker such as Travelex, Currencies Direct and HIFX to fix at a more attractive rate later on.
Once abroad, it’s important to open a bank account as early as possible. But for those used to free banking here, it may come as a shock that in some countries banking charges can be sky high. “European banking is more bureaucratic and more expensive than in the UK. Expect to pay a fee for almost every transaction – paying money in, taking money out. Each direct debit will also incur a small fee,” says Lorreine Kennedy from IFA Carematters.
Taxation is another issue to consider. Property taxes in some countries can be high. In many countries, particularly in Europe, local residents are more than happy to rent so a purchase isn’t necessarily the best route.
If you’re thinking of buying property abroad, there are many complications that could arise. Financing the purchase may not be straightforward. In France, for example, lenders apply strict criteria and lend purely on affordability. Currency issues will also make a huge difference to your costs so using a specialist currency broker could save you thousands. You should also check the building regulations carefully. If you’re buying a new build property, ask if the developer or seller has full title to the land or property. Expats buying property in Spain have hit the headlines after buying properties built on protected rural land and face possible demolition as a result.
Retiring abroad can also pose a risk to your state pension. It can be paid into a bank account in your chosen country and usually in the local currency, but if you are a non-resident, your tax liability will depend upon whether you are living in a country with a double taxation agreement with the UK.
“If the country you live in does not have a double taxation agreement, then you will have to pay UK tax and may be subject to tax in your new country,” says Ms Kennedy. In some parts of the world, your state pension payments will also be frozen, rather than increasing in line with inflation as it would in the UK. This isn’t an issue if you are moving to the EU or one of the countries with a long-standing UK arrangement including America and Turkey, but many popular destinations, including Australia and Canada, do not have these in place.
Investments such as ISAs and personal pensions in the UK may not be as tax efficient in your chosen country so take professional advice. One important question is whether you should move your personal pension funds overseas or leave them in the UK. Once you have lived for five consecutive tax years abroad, some countries permit you to move your pension into what is often a more flexible qualifying recognised overseas pensions scheme. In the UK, pensioners can withdraw only 25 per cent of their pension as a tax-free lump sum, but in other countries, this percentage may be far more generous.
“Many expats will not need larger pension funds to retire abroad. There are many different ways in which benefits can be taken from pension funds and some are much more tax efficient than others depending on where you are going,” says Mr Laird.
Failing to investigate exactly what type of healthcare is available to foreign residents is another mistake expats often make. Although many countries operate a national health service, these won’t necessarily cover the total cost of healthcare. “There are so many variables affecting your entitlement – how long you’ve been living there, whether you’re pre or post retirement. Every individual is different so we advise everyone to investigate what their own entitlement is,” says Karen Teasdale, the expatriate manager at AXA PPP healthcare.
Once you’re receiving your state pension you can access free healthcare within the European Economic Area (EEA), but you will still be expected to pay for some or all of your treatment in some countries. Health insurance is your safest bet. If you hold the European Health Insurance Card (EHIC), this entitles you to reduced or free medical treatment in the EEA. However, this is for short-term residents and should not replace fully comprehensive health insurance.
Check your benefits too; for example, you can receive certain disability benefits and winter fuel allowance only if you remain within Europe.
Story from The Independent