Retiring abroad

For many clients, retiring abroad is a dream come true, but the reality can be full of pitfalls. Financial planners can help their clients to make this ‘transition of a lifetime’ a smooth one
by Neil Jensen

UK retirees have long been seduced by the idea of moving to Spain or France, with its promise of a more temperate climate, lower living costs and the prospect of living by the sea. This explains why almost half of the UK’s state pension-drawing population who have elected to move abroad – 121,000, according to the Office for National Statistics – choose Spain as the place they wish to spend their autumn years. 

With the UK’s imminent exit from the EU, these people may no longer be able to take for granted some of the things they have become accustomed to enjoying. However, it is possibly going to take some time before they receive clarity about how their lives will change.
Why retire overseas?Economics aside, some see the chance to ‘start again’ or undertake some form of ‘adventure’ as the catalyst for change. 

Essex-based recruitment director Bill Brace underlines the importance of having a well-charted plan for making the move, in his case, to Spain. “Reaching retirement age obviously provides the opportunity to make decisions that will shape the rest of your life,” he says. “For my wife and I, this came in 2016, when the UK had just voted to leave the EU. We already had a property in Spain and had reached a point where our affairs were coming to an important stage – children grown up, mortgage cleared, career at a winding-down point. If we didn’t do it when all the fundamentals were reaching this tipping point, perhaps we never would.”

Bill stresses the importance of knowing what you are going into, but even some people with experience of their destination country encounter unexpected bureaucracy and legislation that can derail their plans. And when financial markets and geopolitics tend towards volatility, migrants can often be impacted by events beyond their control.
Things to think aboutForeign exchange risks can be a pitfall for people retiring abroad. Writing in the Q4 2018 print edition of The Review (‘World citizens – a practical example’, pp.42–43), Phil Billingham CFPTM Chartered MCSI, director at Perceptive Planning, says that exchange rate fluctuation can slowly compromise retirement plans. People tend to be familiar with most assumptions around a financial plan – elements like inflation, asset growth and charges – but it is difficult to make assumptions around exchange rates, he explains. For example, the UK practice of deferring drawing a pension, which can deliver gains for the beneficiary, can prove hazardous if there are 10% exchange rate swings, which can erode the benefits gained over a period of time. 

Marlene Outrim CFPTM Chartered FCSI, founder and managing director of UNIQ Family Wealth, says lesser-known local tax regimes can also come as something of a shock for the unprepared expatriate. “In France, for example, county taxes can be complicated, comprising occupier’s tax (taxe d’habitation) and property tax (taxe foncière), and there are also wealth taxes that affect a person’s worldwide assets,” she says. 

Retiring expats have more than one eye on Brexit and how it may change the landscape in the coming years. Phil from Perceptive Planning told The Review in a subsequent interview that one could assume that the UK’s existing double taxation treaties with other EU members, which prevent nationals of either country having to pay tax on the same income twice, will continue. “But,” he adds, “retirees with pensions should be aware that HMRC can be hostile towards people moving their pension abroad – there can be charges that range from 25% to 55%. It’s usually not worth looking at QROPS [Qualifying Recognised Overseas Pension Schemes], albeit they are heavily marketed at expats.” QROPS meet certain requirements set by the UK tax authorities and can receive transfers of UK pension benefits. 

Healthcare is also important, particularly for those in the latter years of their retirement. Marlene from UNIQ Family Wealth emphasises the need to ensure that retirees provide for sickness and that appropriate healthcare insurance is in place. In the EU, UK citizens have been entitled to a certain level of state cover, but with Brexit taking the country out of the trading bloc, healthcare becomes even more of an issue. 

Then there is the property buying process to consider – this can differ from country to country. In France, for example, all the work is handled by a notaire, while in Italy, a country heavy on rules and regulations when it comes to property, lawyers are not necessary. 

Simon Clark CFPTM Chartered MCSI, of Old Mill Group, an accountancy and financial planning firm, suggests that buying a property may not always be the best option. Some retirees he has worked with often opt for a series of long-term rentals to keep costs low and introduce an element of flexibility into their retirement.
Issues at homeOf course, retiring abroad doesn’t mean leaving the UK behind completely. Phil stresses the difference between residency and domicile: a residence is a country where you expect to live for a temporary period and it is possible to be resident in more than one country at the same time; a domicile is where you intend to make your permanent home and remain indefinitely. Your domicile is where you are registered to vote, pay taxes, claim benefits and so on. It is not possible to have more than one domicile. Phil explains: “The UK doesn’t require you to formally emigrate, it is extremely flexible. Maintaining one domicile means you can be resident abroad but still be domiciled in the UK.” 

Phil says expats should maintain their UK banking facilities. They also need to decide what to do with their existing property, if they choose to keep it. One option is to earn income from renting it out. In this case, they are liable to taxation on the money they receive and may find themselves liable to additional tax in the form of capital gains tax, which is charged on the increase in value. Renting out or not, retaining property comes with logistical issues – such as property management, security and cleaning – and the associated costs. Bear in mind that there will also be running costs of the place of residence to plan for. 

Also remember that UK assets may not come with the same benefits abroad as they do at home. For example, the UK pension system allows you to take 25% of a pension pot tax free, but such a tax exemption does not necessarily apply in some countries. It may be worth looking at encashing investments such as ISAs before leaving the UK, as no UK tax would be payable, whereas in some countries, the proceeds from an ISA would be fully taxable. 
Doing your homeworkClients should do their homework and develop a strategic plan that includes healthcare, cashflow, the cost of living, insurances and tax planning. This may be difficult to achieve alone and professional services should be engaged at an early stage. 

The plan should be mindful of how family members still at home, such as children, are affected by a decision to retire abroad. For example, if someone dies while abroad, how will that affect the estate of the deceased? UK inheritance tax is chargeable on worldwide assets at 40% of the amount by which the total value of an expat’s worldwide estate exceeds their nil rate band. If tax is also due to be paid by heirs in the country where the gain was made, tax relief may be obtainable through the double taxation treaty.

UK-based financial planners often cannot advise their clients once they are resident overseas, so seeking a CERTIFIED FINANCIAL PLANNERTM professional in one of the 26 countries that offer and promote this designation is advisable, although it is important that the individual(s) concerned are appropriately regulated. Simon from Old Mill Group says: “Once the retirees move, they need to form trusted relationships with lawyers, accountants and other professional services that can advise them on local requirements and practices. Every jurisdiction has its own peculiar characteristics – for example, in some locations, trusts are not recognised, which, given the age group we are dealing with, can create problems when someone dies.” With that in mind, one of the first things people should do when retiring abroad is establish a will that is relevant and binding in their new country of residence.

With Brexit playing out, the landscape for retirees to the EU – the most popular destination for UK pensioners – is changing. Marlene says she would not dissuade people from pursuing their planned moves, but they should be more vigilant with their preparation. “We live in uncertain times, but foreign jurisdictions also benefit from the influx of overseas money, so there will surely be moves that will continue to make these locations attractive to expatriates. It is a significant market that will change, but it is unlikely to decline in the foreseeable future.” 

This article was originally published in the Q1 2019 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.

Once you have read the print edition, keep coming back to the digital edition of The Review, which is updated regularly with news, features and comment about the Institute and the financial services sector.

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Published: 08 May 2019
  • The Review
  • Brexit
  • Tax
  • retirement
  • financial planning
  • CFP

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