More than three-quarters (79%) of pension savers are dreaming of retiring abroad, according to research by money transfer firm Wise.
While better weather is unsurprisingly the top reason given for wanting to enjoy a retirement overseas, the cost of living crisis is also prompting many to consider a move abroad.
Around 46% of respondents aged 55 and over said they wanted to retire abroad for better weather, while 36% said they would leave the UK for a lower cost of living.
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“The impact of rising inflation continues to be felt across the UK,” said Nilan Peiris, chief product officer at Wise. “Many Brits nearing retirement say this has affected their financial and retirement plans - one in four are struggling to pay household bills, and one in five are saving less towards their pension pots. No surprise, then, that 79% of over 55s dream of retiring abroad.”
Destination-wise, Spain is at the top of the retirement wish-list, according to the Wise research, with 17% of Brits dreaming of retiring there, followed by Australia (13%), Italy (9%) and France (7%).
A separate survey by investment comparison site Investing Reviews found that 70% of people believe it’s harder to retire comfortably in the UK today than ever before.
While UK inflation is now below 10% (8.7% in April), it remains over four times the Bank of England’s (BoE) target of 2% – and food inflation is around 20%, its second-highest rate in 45 years.
There are currently more than 1 million (1,152,585) British pensioners living abroad receiving the UK state pension, according to Department for Work and Pensions figures. This is more than the number of pensioners living in London (922,162).
In terms of the EU, there are 207,300 British citizens aged 65 and over living there, according to data from the Office for National Statistics. Many live in sunny southern European countries, such as Spain, Portugal, Bulgaria, Malta and Cyprus.
If you’re thinking of escaping the cost of living crisis by enjoying your golden years in a warmer and cheaper climate, there’s plenty to think about first.
We outline what retirees need to know about moving abroad, from the impact on their state pension to tax issues.
Your tax position when retiring abroad
Rachel Sestini, managing director of tax consultancy Sestini and Co, says “the reality of moving to live overseas can often revolve much more closely around the financial nuts and bolts than the dream of sunset walks on the beach”.
She says it’s vital people understand the tax implications, in terms of their ongoing UK tax position and the requirements in the country they are moving to.
Sestini explains: “From a UK tax perspective, to have a significant impact and reduction in their ongoing tax liabilities, an individual needs to become non-resident for tax purposes, which is not as simple as spending less than half the year in the UK. Becoming resident in another country also does not mean you are automatically non-resident for tax purposes in the UK.”
The statutory residence test looks at ongoing ties to the UK as well as the number of days spent here, to determine an individual’s residence status. Sestini adds: “There are provisions that make it easier to become non-resident for people going overseas to work full-time, however these typically don’t apply to older or retired individuals.
“The statutory residence test is applied individually to each person moving abroad and it is possible a couple may have differing residence statuses if their travel patterns and/or connections with the UK are not identical.”
Someone who does become non-UK resident will generally be taxed only on UK sources of income and not on income arising overseas. However, there are certain types of income and gains that will continue to be taxed in the UK even to a non-UK resident, in particular:
- UK pensions
- Capital gains (if non-resident for fewer than five tax years)
- Dividends in a personal company (if non-resident for fewer than five tax years)
In relation to the destination country, tax systems vary widely, and can change significantly over time so it’s essential to take advice before committing to a move on how your various sources of income as well as assets may be taxed.
According to Sestini, other regimes may impose taxes on income or gains that are tax-free in the UK, such as the sale of a home or an ISA.
There may also be taxes that we don’t see over here, such as wealth taxes, state taxes, and even church taxes, as well as a range of municipal and social taxes.
Tax incentives to relocate
On the plus side, a number of countries have tax incentives for people relocating, some of which last as long as 10 years, including:
- Portugal’s non-habitual residence regime
- Spain’s “Golden Visa”, sometimes referred to as the “Beckham rule”
- Italy’s foreign talent attraction tax incentives
Some countries are also bringing in digital nomad visas with accompanying tax incentives.
Sestini advises: “It’s worth noting that many of the regimes favour employed/self-employed individuals or business owners rather than retirees, so taking time to plan what retirement might look like is really important to maximise the tax benefits of relocating.
“For example, for a business owner, rather than selling outright or passing the whole business onto the next generation, it could be worth exploring continuing involvement albeit with a new management structure to support a gradual winding down of duties.”
How pensions work if you’re retiring abroad
According to Sestini, UK pensions will potentially continue to be subject to UK tax, even once the pensioner has become non-UK resident.
“Whether it is possible to cease payment of UK tax on a pension will depend on whether there is a double taxation agreement (DTA) with the country of residence and if so, what the pensions article in the agreement says.
“Many DTAs will tax the pension only in the country of residence but even in that case the mechanism for claiming the tax relief can vary. Where a pension can be exempted from UK tax, a No Tax “NT” code can be issued by HMRC to prevent PAYE from being deducted at source.”
Sestini adds that where individuals are moving to countries without DTAs, it could be beneficial to transfer a UK pension over to a non-UK plan that would not be subject to UK tax once the member is non-UK resident. These are known as “qualifying recognised overseas pensions” or “QROPS” - however a transfer charge of 25% of the scheme value may apply unless certain exceptions are met.
This is a big decision and it's important to take independent financial advice from an expert in this area before transferring a pension.
Note that pensioners moving abroad are a target for scams, so be wary of offshore financial advisers. Some are really just salespeople driven by the large commissions on offers from QROPS transfers, which can leave a big dent in your pension.
In relation to self-invested personal pensions (Sipps), the underlying investment strategy should be reviewed with a qualified adviser to ensure it will continue to meet your needs, especially where income will potentially need to be drawn down in a foreign currency.
For workplace pensions, check with the pension administrators or trustees whether moving overseas will have any impact on the timing or flexibility of accessing pension benefits.
Getting your state pension abroad
The UK government pays your state pension regardless of where you live in the world. However, the one important point to check is whether you will benefit from annual increases or not.
The UK state pension will only increase for individuals living abroad in the following locations:
- the European Economic Area (EEA)
- Gibraltar
- Switzerland
- countries that have a social security agreement with the UK, such as the US and Jamaica
However, Brits retiring to countries like Canada and New Zealand do not get annual increases. Instead, their state pension is frozen at the level it was at when they left the UK or first claimed their pension overseas.
For more information about pensions when you move abroad, check out our pensions guide.
Other matters
Sestini notes that people leaving the UK may need to continue to submit UK self-assessment tax returns after departure, for example if they have retained property in the UK that is rented out or if they have a UK pension.
“The self-assessment returns from the year of departure need to include the residence and remittance pages, which report the ongoing connections with the UK as well as numbers of days and visits to the UK during the tax year. It is therefore really important to keep track of flights and other travel into and out of the UK,” advises Sestini.
Those leaving the country can formally notify HMRC of their departure using form P85.
Individuals with UK property that is rented out (whether a former main home or investment property) should use form NRL1.
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