Many over 50s will be dreaming of retiring to a place in the sun when they finally give up work – but better weather and a more relaxed lifestyle can still come with hidden financial problems.
Spain is the favourite destination for UK ex pats, followed by Australia and the USA, according to recent research by financial provider Standard Life.
On the back of this report, several equity release providers are suggesting a financial strategy of equity release in the UK to give the cash to buy a retirement home overseas.
The financial ‘solution’ must involve keeping the UK property as a main home, otherwise this breaches the conditions of many equity release lenders that specify the borrowers must repay the loan on moving from the property.
The problem then becomes tax – an ex pat keeping a UK home remains tax resident in the UK regardless of how long they live outside the country.
Any payments from a pension, annuity or other investments to that ex pat are subject to UK tax as if they still lived in Britain.
Switching to an offshore pension is not an option, because a retirement saver wanting to invest overseas is unlikely to make any tax gain.
Then come problems with the state pension. The payment rules are anyone receiving state pension who lives in a European Union country or one with a reciprocal pension agreement has their pension index-linked.
Australia and the USA do not have reciprocal agreements with the UK, so the state pension is not index-linked, meaning payments are frozen at the level paid on day one. Inflation and currency exchange fluctuations can erode this fixed payment quickly.
The solution for retirement savers looking to become ex pats is to seek expert, independent financial advice before leaving the UK.
Other financial factors also need consideration, like life cover, healthcare and opening foreign currency bank accounts.
“Many people think living abroad is cheaper than living in the UK, but this isn’t always the case. Retirement income will be subject to exchange rates, as well as other factors such as local tax laws and currency fluctuations that could eat into cash piles,” said John Lawson, head of pensions policy at Standard Life.
That place in the sun may beckon with a warm welcome in retirement, but you must look at your finances before you go.
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