Guide to retiring abroad

Retiring abroad is becoming a popular option for much of today’s aging UK population as an increasing number of individuals are heading to other locales for their retirement years. If you also find yourself desiring a little sunshine or a unique cultural experience in your older years, you will likely be immersed into a variety of cultural changes.

Between possibly learning a new language, being introduced to new cuisine, and finding yourself thrust into a culture likely very different than that of the UK, there is much to learn when picking up and heading overseas, and these factors can play a significant role in your chosen retirement destination. However, pension benefits, taxes, and healthcare costs should also contribute to your decision to retire in a certain country. Let’s examine each of these important retirement factors, allowing you to be as prepared as possible when you pack your bags and retire abroad.

Your pension and retiring abroad

Many people are choosing to retire abroad because they are able to continue receiving their UK state pension when they live in another country. In addition to receiving income from investments and savings, the majority of UK citizens who are retiring abroad have both a UK state pension and a personal or employer-sponsored private pension.

Receiving a state pension when retiring abroad

Currently, every single person who has made National Insurance contributions for at least 30 years throughout their working life is able to receive £110.15 a week.

Once you become eligible to receive a state pension, you are able to claim it regardless of your new country of residence. Your pension funds can be directly deposited into an overseas account in the form of the local currency or they can be directly deposited into a bank in the UK. This completely eliminates any bank charges or transfer fees. In addition to these flexible direct deposit options, you can also decide to receive your pension payment once a month or every 13 weeks.

Furthermore, if you work abroad for quite a while before you reach your retirement, you may also be able to receive a pension from the UK and your new chosen country of residence. Unfortunately, unless you decide to live abroad in a country that has a reciprocal agreement with the UK or a country within the European Economic Area, you will not be able to receive the same pension increases as others who are still living in the UK.

Since New Zealand and Australia are popular holiday and retirement destinations, it is important to note that the UK does not have a reciprocal agreement with these countries, so you will not be able to receive a state pension increase if you decide to become a Kiwi or live down under.

Receiving a private pension when retiring abroad

Typically, private pensions are paid out in sterling into a retired person’s UK bank account. The amount can be easily transferred to your foreign bank account, or you can have a currency broker convert the funds into the local currency of your new country of residence, which is often less expensive than paying a bank’s transfer fees.

You can also establish sterling and euro bank accounts with the same international bank to avoid transfer charges. A currency specialist may be able to determine a fixed exchange rate that will allow the rate to be established up to one year ahead of time. This can be tremendously beneficial with today’s volatile and fluctuating currency exchange rates.

Although their services can be very beneficial, the Financial Services Compensation Scheme does not cover currency brokers. Therefore, it is important to choose a currency broker that is an FCA authorised payment institution, rather than simply selecting one that is registered with the FCA. Authorised payment institutions must use a separate account for each customer’s money, ensuring its safety.

Taking early retirement abroad

If you are fortunate enough to retire early, you should consider moving your pension overseas before you begin drawing on it by transferring your pension into a Qualifying Recognised Overseas Pension Scheme, which can be based offshore or in your new country of residence. A QROPS will provide you with added flexibility, and once you have lived in your new country for more than five years, you will no longer be responsible for paying UK taxes on your pension’s income. Your new country of residence will likely have a more favourable tax policy, but you should consult with a specialist IFA beforehand.

Most people about to retire also find themselves concerned with the tax implications of taking a lump sum payment from their pension scheme. While in the UK, you are able to take out as much as 25 percent of your pension completely tax free. Since other countries do not follow the same tax policy, you may want to consider doing this before leaving the UK or simply leaving it invested.

Your taxes and retiring abroad

Certain countries have tax agreements with the UK, so you should find out if your chosen country does as well. Unfortunately, in most cases, you may still be liable for taxes on UK rental income or investments, although your tax liabilities transfer to the new country right along with you.

In your new country of residence, you will be required to declare your total income from every single worldwide income source, even if some of your income comes from UK investments. This may seem like you will be required to pay double taxes, but thanks to the UK’s double taxation agreements with numerous countries, double tax relief is available if you have income that is taxable in more than one country. The UK has these double taxation agreements with all of the most popular retirement destinations, such as Australia, France, and Spain.

Paying pension taxes when retiring abroad

Unlike other income sources, your pension income can never be taxed twice and is typically taxed by your country of residence. Although income tax rates may be quite different from one country to another, many countries will allow you to take out a tax-free initial sum before being charged taxes based upon your income bracket.

Paying savings taxes when retiring abroad

Similarly, your savings income is also usually taxed by your current country of residence. It is important to note that tax-free Isa and NS&I UK accounts are not sheltered in other countries and will be taxed like everything else. However, your chosen country of residence may offer similar types of accounts, saving you a considerable amount of money. For example, France has the Livret A account, which is a tax-free interest-earning savings account.

Paying capital gains taxes when retiring abroad

You may be held liable for paying capital gains tax once you become a resident in another country. However, some countries have specific exemptions. In Spain, you can be exempt from paying capital gains taxes if you have lived in a property for at least three years and are 65 or older. In France, South Africa, Australia, Ireland, and Canada, your home can be excluded from the capital gains tax.

In the United States, if you sell your home, you will be exempt from capital gains tax for up to $250,000. A similar exemption of up to €85,430 is available in Cyprus, and New Zealand does not have a capital gains tax. This should be welcome news if you are planning to join the thousands of other native UK citizens who are deciding to retire abroad.

Paying inheritance tax when retiring abroad

Inheritance tax varies quite considerably in other countries. In addition to having to follow your new country’s income tax laws, you will be required to follow the country’s inheritance tax laws as well. In most cases, you will be charged an inheritance tax above a specific threshold based upon your entire estate.

In the UK, this threshold is currently £325,000 for a single person and £650,000 for married couples. An inheritance tax of 40 percent is then charged on everything above these thresholds, except for transfers that take place between married couples or civil partners.

In France, transfers that take place between married couples or civil partners are also exempt from an inheritance tax, and each child is able to receive an allowance of €100,000. Above this amount, the inheritance tax has different rates based upon the amount involved and the individual who is receiving the inheritance. Siblings of the deceased are taxed at 35 percent for any sum below €24,431 and 45 percent thereafter. The rate for children varies from 5 to 45 percent.

Spanish tax law dictates that the inheritance tax is dependent upon the relationship of the beneficiaries to the deceased as well as the total number of beneficiaries. Descendants can expect the taxable sum to be reduced by €15,956 or more, and other beneficiaries benefit from a reduced taxable sum in the amount of €7,993 or more. Spouses and partners must pay an inheritance tax, but nearly all of the value of the family’s home can be exempt as long as they or their children own the home for at least another ten years. The inheritance tax rates vary in each region, but it ranges from nearly eight percent to 34 percent.

The inheritance tax was recently reintroduced in Italy in 2006. However, the rate is quite low in comparison to other countries. In the U.S., inheritance tax rates range from 18 to 35 percent only on estates valued at over $5 million. Canada does not have an inheritance tax at all for surviving spouses, but it falls under the realm of a capital gains tax or additional income tax for any other beneficiary. New Zealand and Australia are well-known for not charging any inheritance taxes at all.

Inheritance rules for retiring abroad

Depending on the country, the rules dictating who you are able to leave your estate to may vary from the rules found in the UK. For example, rather than being able to signify your beneficiary in a will like you can do here in the UK, French law dictates that you cannot leave your entire estate to your spouse, because your children will enjoy an undisputable claim. This may prove problematic if you and your current partner are not married or if you have children from a prior marriage but have since remarried.

Thanks to these varying inheritance tax rates and local laws, you should seek tax and legal counsel before deciding to retire abroad. Retiring in Italy may prove beneficial to your surviving loved ones, while retiring in Spain will be far more expensive if you do not take specific actions to protect your estate.

It is also important to note that retiring abroad and paying taxes to another country will not ensure the safety of your estate from the HMRC. In fact, the UK government may be able to claim your estate if you are still considered legally domiciled there.

Your healthcare and retiring abroad

If you are considering retiring abroad, the availability and cost of healthcare should be a considerable concern. In the UK, you are able to enjoy free universal healthcare from the NHS, and private medical insurance is not essential. In some countries, such as the U.S., this is far from being the case. In the U.S., healthcare is completely privatised and medical insurance is an absolute necessity. If you are planning to retire in South Africa, you will face a similar scenario.

Countries where insurance is recommended

Spain, Italy, and France have adequate state healthcare systems, which greatly reduces the cost of medical treatment and care. However, you will need to obtain an S1 form prior to your arrival in any of these countries. You should also have private medical insurance, because you will still be required to pay approximately 30 percent of the cost of medicine and medical treatments. Although you must pay at the end of each visit, you can have the insurer deposit the money you paid directly into your account as recompense.

Countries with universal healthcare systems

There are numerous countries that offer universal healthcare that is strikingly similar to the UK’s NHS. Although Australia, New Zealand, and Canada have systems that are most similar to the UK’s system of free healthcare for all, Germany and Ireland also have universal healthcare. In these countries, private medical insurance may not be needed, but it will provide you with decreased wait times and more choices.

Thousands of Brits retire abroad each and every year, and as long as you plan wisely, you will not have to worry about receiving your pension, paying taxes, receiving the healthcare you need, and anything else that may prohibit you from having the time of your life.