Planning for a retirement in paradise
Colin Dyer | October 03, 2018
Winter is coming
Storm Ali served as a blustery, cold reminder that winter is coming. As it approaches, I can sometimes find myself thinking of the tropical paradises and sandy beaches of warmer climates.
And it seems like I’m not alone – last year over 200,000 Brits of age 65 or over had settled in Europe alone to spend their retirement. Of course, I can understand why a retirement spent relaxing in the sun sounds very pleasant right now. But if you also share this dream, what are some of the things you should consider to make sure your finances don’t flounder in foreign waters?
If you’re thinking about retiring abroad, one of the main thoughts on your mind is probably about your pension. Here are some of the main pension questions we get asked:
Q: Can I access my pension if I retire abroad?
A: Yes. However depending on the circumstances, you might be limited in how you can withdraw from your pension once you leave the UK. So it’s worth checking what flexibility your pension provider offers in drawing money out your pension when you’re abroad.
Depending on the outcome, this could mean you may need to transfer your pot to another provider. But that’s where you might have a problem. By transferring, you are opening a new product and most UK providers are not authorised by the regulator to offer a UK product to a non-UK resident. If you do decide to transfer, remember that transferring is not for everyone. The value of any pension can still go down as well as up, and could be worth less than what was paid in so you should seek financial advice before making any decisions.
Q: How much tax will I pay on my pension?
A: This will depend on a number of factors including which country you choose to move to.
Some countries may have a double tax treaty in place with the UK. This treaty could allow you to only pay tax on your pension in your new country provided you take certain steps.
These steps include applying to HMRC (via HS304 form) to get official evidence you’re a Non-UK taxpayer. You can then give this proof to your pension provider so they can make any payments without deducting UK tax.
Depending on national rules, tax deductions in your new country could work out as less tax than you would’ve paid in the UK. However you might wish to consider taking your 25% tax-free lump sum before you leave, as this is taxable in many other countries. Laws and tax rules can change and your personal circumstances also have an impact on tax treatment.
Q: Can I keep topping up my pension if I move abroad?
A: You’ll be able to keep your pension running and will still benefit from any UK tax breaks. However topping-up depends on your provider – some will allow it but others won’t. Your financial planner can look into this before you go and make sure you’re in the best position for your circumstances.
Q: What will happen to my state pension if I leave the UK?
A: Once you’ve qualified for the state pension you can claim it from anywhere in the world. But, under current rules, you won’t benefit from any state pension increases unless you move to a country in the European Union’s single market, or which has a social security agreement with the UK. It’s worth remembering that there’s no guarantee this position will stay the same after Brexit.
If you move elsewhere, such as Canada, New Zealand or Australia, then your state pension will not rise with inflation.
Retiring abroad – does tax travel with you?
What, when and where are very important tax questions if you’re considering moving abroad. If you don’t plan things properly you could end up paying tax on your income in both the UK and your new country of residence.
Seeking financial advice before making the move could help you get a clearer perspective. But remember, once you have moved and do not have an address in the UK the ability to access an UK adviser may be limited unless they have appropriate permissions to provide advice to an overseas jurisdiction.
The definition of residency is about a combination of the number of days you spend in the UK in a tax year and your number of ties with the UK. You can read HMRC’s full guidance note on residency for more information.
Essentially, HMRC looks at the number of connections you still have with the UK and then how many days you actually spend in the UK and for what purpose.
The more connections you have the less number of days you need to be in the UK before HMRC will consider you a UK resident.
This means you need to be aware of your connections to the UK and how often you come over. There are pros and cons to having UK residency for tax purposes and your financial planner will be able to work out which outcome will best fit your circumstances.
If you do end up paying tax outside the UK, it’s important to appreciate that different countries have very different rules and regulations. You should get to know the detail and take it into account when making any big decisions.
If you move abroad, tax-free savings vehicles such as ISAs can no longer be topped-up. However you can leave money in there which will continue to benefit from UK tax breaks.
But for on-going savings, any income will be liable to the tax rules of that country. Although depending where that is, there may be other options open to you. A financial planner from your new country will be able to help you continue to save tax-efficiently.
Alternatively, if you do move abroad but continue to pay taxes here, our Tax and Trust specialists can still handle your UK tax return.
Picking the perfect property
A major benefit of retiring abroad is that property prices in many places are lower than in the UK. But if you’re buying abroad you have more to think about than deciding between a beach-front bungalow and a villa with a view.
When buying a house the customs and laws vary greatly around the globe. It’s wise to engage the help of a local lawyer and estate agent to make sure you don’t fall foul of any rules that are different to those at home.
It’s also important to take currency considerations into account. When you’re dealing with the amount of money typically required to purchase property, fluctuations in currency value can have a big impact, so you should regularly review this.
There are various methods of dealing with this. For example, one is to lock in the exchange rate with a foreign exchange company at the start of the buying process. This means that the price you agree won’t be affected by any movement in currency value. However, depending on whether the exchange rate rises or falls, you can’t know what impact you’re preventing.
If you had your sights set on retiring in Europe, Brexit will be a huge consideration for you. There are still lots of issues to be ironed out as Brexit negotiations are ongoing. Among others, these issues include freedom of movement, tax, healthcare, and of course the expat situation.
Whilst there’s nothing to indicate that retiring abroad will be made impossible by Brexit, the volatile situation could mean the need for professional financial planning will be all the more useful when planning your move abroad and adhering to any new rules that may come into play.
Ready to retire abroad?
I’ve gone through some of the financial factors you should consider before leaving behind your life in the UK, and while it may seem like there’s a lot to think about, the key to success is proper preparation and planning.
If this is something you’re thinking about, talk to your financial planner. They can do the groundwork to make sure you’re set up for the big move. In terms of preparation there are three key actions:
1. Make sure that all your financial products will operate the way you need them to after you’ve moved.
2. Check to see if you will be able to continue topping up your savings tax-efficiently
3. Check what tax could apply to your UK products in your new country of residence, including when you come to withdraw money.
As part of your planning, have a conversation with your financial planner about your lifestyle goals. Your income and capital need to be secure and sustainable so you can live your retirement dream without worry.
However, it’s worth noting that UK-based financial planners need specific permissions to advise overseas. And while some do meet the requirements, this doesn’t mean that they have comprehensive knowledge needed to advise on tax and legal implications abroad.
Your financial planner can help you understand how these considerations might affect you upfront, but it is advisable to speak to a professional who is an expert in your new country.
If you have any questions about anything covered in this blog, your 1825 Financial Planner will be happy to help.
Laws and tax rules may change in the future. The information here is based on our understanding in September 2018. Personal circumstances also have an impact on tax treatment. The information in this blog or any response to comments should not be regarded as financial advice.