The Moneywise guide to retiring overseas

Published by Rachel Lacey on 01 October 2013.
Last updated on 16 October 2017

man floating on rubber ring in the sea

Whether it’s the pull of sun, sea and sangria, or a quieter life in a rural idyll, there will always be Brits who want to retire abroad. In many cases, the cost of living will be lower overseas, adding to its appeal.

One in 10 people over the age of 50 would like to retire overseas, according to new research by equity release specialist Retirement Advantage. Yet just how feasible it is depends on several factors.

Andrew Tully, pensions technical director at Retirement Advantage, says: “Without the right planning and financial advice, your retirement [overseas] could very quickly become a nightmare. Local tax laws, currency exchange rates and other financial issues can easily catch out the unwary.” Here, we look at the key financial issues you need to consider before you make the move.

A weak pound

The Brexit referendum has undoubtedly added a spanner to the works for those wishing to retire within the European Union – and elsewhere.

When your income is in one currency but you are spending it in another, currency fluctuation will always be a risk and it is one that has been heightened by the vote to leave the EU.

In the summer of 2015, sterling was at a five-year high, worth around €1.44 to the pound, and by the time of the referendum it was at €1.3. The following day, it dropped off a cliff edge and, at the time of writing, it was still down at €1.12. This means that since sterling hit its high of €1.44 to the pound, the spending power of Brits in the eurozone has dropped by a painful 25%.

Ian Strafford-Taylor, chief executive at foreign exchange firm FairFX, says: “The pound reacts to political and economic shifts and since the result of the Brexit referendum we have seen the true impact of this. Looking ahead, it’s difficult to predict how Brexit negotiations and Britain’s subsequent separation from the EU will affect the strength of the pound.”

Alistair McQueen, savings and retirement manager at insurer Aviva, agrees: “If negotiations go well, the pound will go up and if they go badly it’s likely to go down.” He adds: “It’s a very hard problem to mitigate against – Brexit just adds a whole new level of risk.”

Free movement and other Brexit concerns

Until the Brexit negotiations are finalised, there is also uncertainty surrounding the free movement of people and the rights of British citizens living in the EU.

Research from investment firm Old Mutual among British expats already living in the EU found that this is proving a major concern, with 48% citing Brexit as their biggest worry. Almost one in five (19%) said the value of the pound was their concern, while 18% cited inflation – both issues that are linked to our imminent departure from the EU.

Impact of inflation

Whether you plan to retire in the UK or overseas, you’ll need to consider the impact of inflation – the rising cost of living – on your income and your ability to maintain your lifestyle over time.

Mr McQueen says this means it’s important to research inflation trends in the country you plan to move to. “We’re familiar with inflation in the UK, but it will be different in other parts of the world. Traditionally, inflation in Britain has been lower than other developed countries.”

Exactly how much of an issue this is will depend on your income and whether it is fixed or linked to inflation. It’s clearly less of a worry if you have an income that is index-linked, although bear in mind that if it is, it’s likely to be linked to inflation in the UK – not the country you are living in.

Will your state pension be frozen?

According to Aviva, the state pension accounts for between a third and a half of the typical retiree’s income so it’s vital you understand your rights regarding annual increases before you make any decisions.

In the UK, retirees enjoy the benefit of the triple lock – for the time being at least – which ensures that their state pension rises by the greater of average earnings growth, inflation or 2.5%.

However neither this, nor any other inflation safeguards, are guaranteed to every expat retiree and where you retire can make all the difference. Tim Snowball, spokesperson for campaign group, the International Consortium of British Pensioners (ICPB), explains: “Everywhere in the world that you retire, you will be able to get your state pension, but if it’s not a country with which there is a social security agreement, you’ll lose out on any increases.”

Currently, retirees emigrating to the European Economic Area (EEA), plus Switzerland and Gibraltar, are protected and there are also agreements in place across a hotchpotch of jurisdictions including Guernsey, Isle of Man, Jersey, the USA and much of the Caribbean.

You can get a full list at Gov.uk/government/ publications/state-pensions-annual-increases if- you-live-abroad/countries-where-we-pay-an annual- increase-in-the-state-pension.

However, there are some notable exceptions that are popular with British retirees including Australia, Canada, India, New Zealand, Pakistan and South Africa where retirees will not receive state pension increases. Mr Snowball says many retirees do not realise their pension will be frozen.

“When you first move, you are not thinking about your income in your later years,” he says.

But the impact of missing out on these increases cannot be underestimated, particularly if you are facing costs, such as funding your own healthcare, that your peers in the UK will not. Figures from the ICBP show that the average state pension of a ‘frozen’ pensioner is £2,258 a year compared to £7,198 in the UK.

Mr Snowball adds: “Take a British expat who is 90 now and retired in 1991. They would still be on £52 a week compared to the approximate £120 they’d be getting if they were still in the UK.”

While expats in Europe still get the benefit of state pension increases now, another concern is that this is not currently guaranteed post-Brexit.

Mr Snowball says: “The government has indicated it intends to protect pensioners, but it is reliant on us getting a deal with the EU. It relies on a reciprocal agreement.”

The ICBP is campaigning to overturn the “quirks of history” that see expats in different countries receive different amounts of British state pension.

Mr Snowball says: “Equal payment into the state pension should mean equal entitlement. Why should retirees to Canada not get increases when retirees south of the border in the USA do?”

Before moving overseas, you need to contact the International Pension Centre at www.gov.uk/ international-pension-centre. You can opt whether to have your pension paid into a UK or overseas bank account, and to receive it once every four or 13 weeks. If it is for less than £5 a week, it is paid annually in December.

Charges for transferring private pensions

Most private and workplace pensions will pay money into a UK bank account. You can either draw this money out yourself with your debit card or transfer it into a foreign bank account. Those pension companies that will pay your money into a non-UK account are likely to charge a fee for doing so.

It’s vital you check how much your provider will charge and the exchange rate you will get before you move any money. It’s likely to be cheaper if you use the same bank in both countries. Alternatively, you may save cash using a money transfer service, so research all your options first.

If this all feels like too much hassle, it is possible to transfer your UK pension into a ‘qualified recognised overseas pension scheme’ or QROPS for short. Rachael Griffin, financial planning expert at Old Mutual Wealth, explains: “These are generally for people who want to leave the UK and not return, in order to simplify their affairs. It means, if you are living in Spain, for example, that you are paid in euros and any currency risk is removed.”

In 2016, £1 billion of UK pension savings were moved into QROPS. But transferring out of a UK pension is not a decision to be taken lightly, however convenient it might seem.

Mr McQueen says: “As with any pension transfer, you will need to know what charges you face and you must also be aware that you won’t have access to the new pension freedoms.” Instead, you will be governed by the pension and tax rules in your new country.

Ms Griffin says you also need to be sure that you won’t change your mind. “According to the statistics we often see, when people become less healthy they want to return home,” she says.

“Likewise, if your spouse or partner dies you may decide that the expat life is no longer right for you.” “It’s a complex area so we always urge people to take advice,” she adds.

Confusion over tax

When people move overseas there is always a lot of confusion about how their money is taxed, both during their life and once they have died.

However, any income or gains from savings, investments and property that are still held in the UK will still be subject to UK tax. Furthermore, if you are still considered to be UK domiciled when you die, your beneficiaries could be liable to pay inheritance tax on all of your assets, irrespective of whether they are held in the UK or not.

This issue of whether an expat is considered to be UK domiciled is particularly confusing. In order to lose your UK domicile status, HMRC will expect you to sever all links with the UK and have no intention to return – yet this is not these easiest of matters to assess. “There are no hard and fast rules,” says Ms Griffin, “HMRC may not be sure of your domicile until after your death.”

Research from Old Mutual Wealth shows that 74% of expats who consider themselves to no longer be UK domiciled still have assets in the UK, while 81% still say they may return to the UK at some point. As far as HMRC is concerned, the expats in both these examples would still be deemed to have UK domicile.

Adding to the confusion, it is also likely that you will be answerable to the tax authorities in your new country of residence and may need to provide details of your worldwide income and assets. However, the good news is that the UK has double tax treaties with more than 130 countries, which means you shouldn’t get taxed twice on the same money.

Ms Griffin urges those who are moving overseas to get specialist tax advice before they go. “It’s a minefield,” she says, “the rules are constantly changing so you need ongoing advice.”

“I can’t go on living on the breadline”


 

Anne Puckridge (pictured above), 91, is a former college lecturer who lived and worked in the UK until 2002 when she decided to move, age 77, to Calgary in Canada to be closer to her daughter and grandchildren who moved there in the 1990s.

However, 15 years later, Anne, who also worked as an intelligence officer for the Women’s Royal Navy during the Second World War, is struggling to get by on her British state pension, which was frozen at £75.50 a week when she emigrated.

Unsurprisingly, Anne doesn’t like to call on her family to help and feels she may soon have to move back to Britain because she simply cannot make ends meet.

She says: “It’s the small things and the injustice, that is really getting to me. I value my independence but I can’t go on living on the breadline and I don’t want to inflict this on my family. As well as ever-increasing poverty, I feel a sense of stress and shame, which is affecting my health.”

“We always make sure we get the best exchange rate”


 

Richard Hill, 65, and his wife Annie, 62, moved to France in 2008 when they bought a property in Salies de Bearn in the foothills of the Pyrenees. The couple, who previously lived just outside Bath in Somerset, are now fully immersed in French life with no plans to return to the UK.

“We’ve been here for nine and a half years and rarely go back. We’ve sold up everything and most of our friends are French now,” says Richard, a former HR director.

However, both their finances and their peace of mind have been impacted by the Brexit vote.

“Our only worry now is that we may lose our automatic right to live here,” he adds.

The couple have capital held in Luxembourg and have income from pension schemes paid into a UK bank account

rather than their French one. “We manage the movement of money between our accounts according to what’s happening with the exchange rate and we always use a transfer service, such as Caxton FX, to make sure we get the best rate,” he explains. However, they do not want to move more money into France until the exchange rate improves.

“I have a pension from when I worked in Brussels which is paid in euros, so that has given us a year’s breathing space,” he adds.

“It’s cheaper living in France than the UK”


 

Allan Bouckley, 66, and his wife Elizabeth, 65 (pictured above), moved to France in 2007 after he retired from his job as a communications manager for an electronics company.

The couple, from Minehead in Somerset, initially moved to their holiday home in Perpignan, but have since renovated and moved into a stone cottage in Normandy.

The location makes it easy for them to maintain links with the UK, where they still have family.

“We can leave here at 6am and be picking up our grandson from school in Maidenhead at 3pm,” Allan explains.

Like many expats, Allan and Liz have their pension income paid into their UK account. “We then move as much as we need every month into our French account, using TransferWise,” Allan says.

He isn’t overly concerned about the UK’s imminent departure from the EU. “I feel really positive about it,” he says. “Both sides need a deal, so I am not worried.”

The couple are, however, mindful that their money is not stretching as far as it did. “The euro was at €1.4 to the pound and now it’s around €1.11. It’s not really caused us any major problems, but we have scaled down on eating out. We still feel that it is cheaper living here than the UK.”

Allan and Liz feel settled in France: they have a good social life with locals and like-minded Brits. “The health service in France is excellent,” he adds.

However, they have not ruled out a return to the UK at some stage. “We may buy a flat back in the UK over the next five years. I would happily spend the rest of my life here, but my wife may want to go back at some point to be closer to family,” he says.

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