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Retiring abroad: sun, sand and spending power

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Many of us dream of retiring to warmer climes. But the cold reality of financial uncertainties can cause some people to abandon their plans – or to find that money issues mean life abroad isn’t all they’d hoped it to be. The more thought you give to funding retirement overseas – and the less obvious costs involved – the better your chances of making a successful move. 

Currency fluctuation

This is one factor which can have a major effect on your spending power. The most popular retirement hot spots are in the Eurozone, so we’ll use the Euro as an example. However the same considerations apply to any foreign country.

At the time of writing, the exchange rate is around 1.12 Euros to the Pound. However over the last five years, the exchange rate has fluctuated and has been as high as 1.44 Euros[1].

As most of your UK income will be paid in Pounds, you need to consider how exchange rate fluctuations will affect your spending power. This applies to all of your income paid in UK currency including your private pension, state pension and investments and bank accounts denominated in Pounds.

Since the high of 1.44, the spending power of UK-derived income in the Eurozone has fallen by about 20%.

A lasting dent in income like this can have profound effects on what might otherwise be an idyllic retirement in the sun. Being unable to eat out, or travel around, could turn the dream into a nightmare.

Local inflation

As well as the changing value of your UK-derived income due to exchange rates, you also have to think about the impact of local inflation.

Here is a list of approximate local inflation rates across a selection of countries today[2].

  • France: 0.7%
  • Italy: 1.2%
  • Canada: 1.3%
  • Spain: 1.5%
  • EU average: 1.6%
  • USA: 1.9%
  • UK: 2.9%

The faster prices rise, the faster this will eat into your retirement income.

Other financial considerations

Tax

Anyone hoping to plead “no tax please, we’re British” is likely to be disappointed.

Some countries have higher rates of income tax than the UK, while others have lower. In addition, some countries tax income received from abroad, such as UK pensions, at a different rate than locally derived income.

Another tax issue to be aware of is whether you will be taxed twice – once in the UK and once in your new country of residence. The UK has a large number of ‘double tax treaties’ in place which should prevent this from happening to you – but not all taxes are covered by these treaties.

You should consider consulting a tax specialist to fully understand local taxes – not just on income, but on capital gains, property and inheritance.

Currency conversion costs

You should think about how to get the best deal when turning your British income into a foreign currency. Should you use your current bank, a specialist currency broker, or should you set up a separate foreign currency account alongside a sterling account? If you’re transferring a large sum into an account abroad it’s also worth checking that the bank won’t charge you a fee for receiving your money – this can sometimes happen.

 

Private pensions

It’s currently possible to transfer your pension to another country as long as the new pension is in the EU, or meets certain criteria laid down by Her Majesties Revenue and Customs (HMRC). These pensions are referred in the UK as ‘qualifying recognised overseas pension schemes’, or QROPS for short.

A note of caution, though. The UK currently has a very flexible pension system, as far as withdrawing money is concerned. Make sure the new pension in the foreign country has the withdrawal options that meet your needs. Also check if the foreign pension is protected by a local compensation scheme.

The charges for overseas pensions may also differ, so check this fine print before you sign on any dotted line.

Finally, a word of warning about foreign (possibly ex-pat) financial advisers. They may not be as well regulated or as well qualified as UK-regulated advisers.

 

And the rest …

There are of course a host of other things you will need to think about – including buying a new house and selling or renting-out your UK home. Healthcare is also a potential hidden cost that should be well researched in advance. But hopefully this has given you a few things to think about if you’re considering a move abroad in the future.


WC04354 07/2017 

 

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