Retiring abroad: When the dream becomes a nightmare
Picture it: you've found the house of your dreams in a picturesque Spanish village. You sign the contract, down a deposit and head back to the UK to tie up loose ends and sell your home. Your retirement dream of a life in the sun is in full swing. But within a matter of weeks it all comes crashing down.
Sue Walker, 63, and her 67-year-old husband John, from south London, had to face this grim prospect. They had been looking for a retirement home abroad for several years and finally settled on a planned new development in Santa Ana del Monte, Spain.
They put down a holding deposit of a couple of thousand euros. "We had an English-speaking solicitor who checked the contract," says Sue. "You hear about problems with delays in building, but the contract allowed for these. If it wasn't finished on time, we could terminate the agreement."
However, the couple weren't aware there should have been a bank guarantee in place from the developer to protect their payments. Neither their estate agent nor their solicitor informed them of this. "When we asked about it we were told it wasn't necessary," says Sue.
The property should have been ready by the end of June 2011, but the couple were told there was a slight delay and it would be completed by December 2011; in the meantime they were to be reimbursed for rent.
"One day we got a message from a friend who seemed worried and, after looking on the company website, we found out the developers had gone into voluntary administration," says Sue.
"We said we wanted to cancel our contract and get our money back, but without a bank guarantee it's difficult. We've been offered 65% of our deposit back, but we've not received a penny as yet, and we're not in a position to fight it."
Sue and John have now bought another property in Jumila and published a book on retiring abroad (Retiring the Ole Way), but unfortunately their experience is all too common.
There are currently 1.2 million Britons claiming a pension abroad, and a report by the Institute of Public Policy Research claims that by 2050 one in five pensioners will choose to spend their retirement years on foreign shores.
But many who have opted to move abroad have found their retirement dream turning into a financial nightmare.
"It's a minefield for the unwary," says David Creffield, author of The International Retirement Directory. "Buying 'off-plan' is the danger zone. All too often the developers run out of money and the promised facilities - pool, tennis courts, and so on - fail to materialise."
Problems can arise when couples sign on the dotted line to buy while they're still in the UK, then move abroad and rent a property while they wait to move into their new home. If that home doesn't materialise or there are problems with it, they find they are stuck.
Surprisingly, many overseas buyers buy 'sight unseen', which means they have never viewed the property or even seen a blueprint. Sadly, by doing so, they risk finding their dream beach house with sea views is actually a rundown shack overlooking the neighbouring building site - and will have only have themselves to blame.
Property laws differ from country to country, but if you've not covered yourself sufficiently there's little you can do. Make sure your agent is qualified and check what guarantees are in place before you sign anything.
If you do lose money you stand a much better chance of getting it back if the developer has a bank guarantee in place - not all do, despite this being property law.
Another point to bear in mind is that in some countries, including Spain, debt stays with a property, not the individual, so if you buy a house where the previous owner didn't pay the community charges (local land charges and council tax), for example, you will be liable.
Debt problems among retirees living abroad are soaring. Moving abroad for a 'better lifestyle' has left many over-65s struggling to stay afloat.
The Consumer Credit Counselling Service (CCCS) says it has seen a 33% jump over the last 12 months in the number of people living abroad who contacted it because they were having problems repaying UK debts, due to the weak pound.
Anyone expecting their pensions to see them through might be in for a cruel awakening. If you move abroad permanently you're still entitled to your UK state pension.
In the UK this rises in line with inflation; you'll continue to receive this annual increase if you retire to any EU country, including Gibraltar, or any country with a reciprocal social security agreement with the UK.
However, if you retire to countries outside of this remit (including Australia, Canada, New Zealand and South Africa), your pension will be frozen at the amount when you first claimed it or, if you emigrate more than a year after payment began, at the rate you were receiving when you left the UK.
"Your retirement income must be sufficient to stretch over a long period," says John Lawson, head of pensions policy at Standard Life. "Over a 20-year retirement, your basic state UK pension could halve in real terms if a reciprocal arrangement is not in place."
One of the biggest pitfalls in moving abroad is healthcare. While it's easy to criticise the NHS, you quickly realise just why the UK healthcare system is regarded as one of the best in the world when you find yourself in a foreign country without the safety net of the family GP or your local A&E.
Due to old age or chronic ailments, many retirees will find they need medical attention at some point. It can be stressful enough trying to make yourself understood to medical staff who speak another language - but add the fact you may have to pay for treatment and your medical nightmare gets a whole lot worse.
Your European Health Insurance Card gives you access to state-provided healthcare in Europe, either free or at a reduced cost. You can apply for your card at nhs.co.uk.
But these cards are a temporary measure, and once you become a resident, you'll not be able to use it. As a pensioner in Europe, you'll need a S1 form (previously called an E112 form) for healthcare cover.
However, outside the EU you'll probably have to foot any medical bills yourself, so it's essential to take out private medical insurance. You'll have to take out international cover, as conventional medical insurance will only cover you in the UK. (For example, a Bupa International Worldwide Health Options policy will cost a 64-year-old woman £2,244.83 a year, while for a 70-year-old it rises to £3,638.78.)
But international private medical insurance won't cover you for long-term care, so it's important to make sure you have sufficient savings kept aside to cover this.
And if your retirement dream does turn sour and you want to move back to the UK, you could face even more problems. The property price crash still has much of Europe in its grip - some reports claim house prices in Spain have fallen by as much as 30% since 2007.
Expats can find themselves trapped: they can't sell up as the local property market has stalled. Even if they find a buyer, they're unlikely to make enough through the sale to buy a decent property back in the UK.
Living abroad: Inheritance tax snares
While the death of a spouse is unlikely to be something 'silver surfers' setting off for a life in the sun want to think about, if you don't make arrangements you could find yourself losing everything.
In Spain, for example, assets do not pass automatically to a spouse tax-free. Some widowed partners could face having to pay up to 34% in IHT on the death of their partner. For a 70 or 80-year-old pensioner, who has spent their life savings on the move, this could be impossible.
There are a few ways to reduce IHT abroad, including selling your property to future inheritors. But this has to be done before the death of the owner. If it's not, there's little else you can do.
Five tips to retiring abroad successfully
- Try before you buy - don't pick a property in an area you've never been to or only visited once. Renting in the area for a few weeks prior to buying anything is a good idea.
- Check the pension implications before you leave, and make sure you have sufficient funds to cover any shortfalls.
- Take out medical insurance if you're moving outside Europe, or fill in an S1 form as soon as you arrive if you're living within the EU.
- Buy carefully and avoid any offer that sounds 'too good to be true'; overseas legal systems are complex, so getting your money back may be difficult
- Take financial advice on the tax implications and where necessary transfer assets to minimise inheritance tax.
Private medical insurance
PMI allows you to skip the NHS waiting list and arrange treatment at a time you choose. With most PMI policies, you pay a monthly premium (the older you are, generally the higher premium) and the policy will then pay out, up to specified cover limits and after an agreed excess, for any treatment you might need. Not all conditions are covered by PMI and you get what you pay for: the more cover you want, the higher your premium will be.
An off-plan property is one sold to the buyer before it has actually been built and so the prospective buyer relies heavily on architect drawings, scale models and the assurances of the property developer in order to “see” what they’re buying. For investors or speculators, in a rising market, buying off-plan means you buy at this year’s prices and, when you take possession, the market value will have increased. The biggest risks with off-plan are the developer will go bust or not complete the project or that the market will fall and the completed property will be worth less that the agreed purchase price.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.