Dreaming of retirement in paradise

Winter is here

In the middle of winter sometimes you can find yourself thinking of the tropical paradises and sandy beaches of warmer climates.

If you do, then you're not alone. Last year Old Mutual completed research which reports that more than half of Britain's wealthiest individuals are planning to spend the majority of their retirement overseas. The new found flexibility around pension withdrawal introduced in April 2015 makes retiring abroad a more realistic venture for many.

Of course, you 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?

Pension questions

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. Some pension providers don't offer the flexibility required for you to draw out money from your pension when you're abroad.

This means that 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.

Q: How much tax will I pay on my pension?

A: This will depend entirely on which country you choose to move to. If you choose a country which has a double taxation treaty with the UK then you will only pay tax on your pension in that country.

Depending on national rules, this could work out as less tax than you would've paid in the UK. For example, in Portugal you would pay no tax for the first ten years and in France, you would pay just 7.5% on lump sums. On the other hand, the 25% tax-free lump sum that you can access in the UK is taxable in many other countries.

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 Standard Life Private Client Manager 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 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.

If you move elsewhere, such as Canada, New Zealand or Australia, then your state pension will not rise with inflation.

Laws and tax rules may change in the future. The information here is based on our understanding in January 2016. Personal circumstances also have an impact on tax treatment.

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.

The definition of residency within the UK was changed back in 2013 and it's now 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.

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 ties you have, the fewer number of days you need to be in the UK before HMRC will consider you UK resident. Ties to the UK can cover a variety of factors but mainly refer to your employment and whether or not you have accommodation in the UK.

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 Private Client Manager 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.

Picking property right for you

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.

One method of dealing with this 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.

Prepared to retire abroad?

These are 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 Standard Life Private Client Manager. 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 Private Client Manager 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 Private Client Manager 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 Standard Life Private Client Manager will be happy to help.

Laws and tax rules may change in the future. The information here is based on our understanding in January 2016. 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.

This site is for UK clients of our Private Client Management service.