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Make the most of retiring abroad

(with thanks to the Telegraph.co.uk)

John Greenwood examines how to put your finances in order before moving to the Continent

Retiring to a place in the sun is a reality for an increasing number of people. More than 1m Britons have their pensions paid overseas, with 74,000 receiving their pension in Spain alone (compared with just 26,700 a decade ago), according to new figures from the Department for Work and Pensions (DWP).

But setting up your finances properly is as important as choosing the right villa. Get it wrong and you could be paying tax where you do not need to, forking out commission where it is not necessary and footing the bill for expenses you had not foreseen.

The situations can be very different depending on where you retire. Here are some factors to consider if you are heading for Europe's most popular destinations.

Taxation

Generally you will be taxed wherever you are resident. The taxation of expats is complicated, but as a rule of thumb you will continue to pay UK taxes as long as HM Revenue & Customs considers you to be a UK resident. You will remain liable for British taxes if you spend 183 days or more in the UK, or your visits to this country average 91 days or more a year over four years.

Double taxation agreements with Spain, Italy, France and Portugal mean you will not be taxed twice on the same income and that you can ask for UK income that is normally paid net of basic rate tax to be paid to you gross. Such payments include interest on bank and building society savings accounts, as well as income from bonds, pensions and annuities.

If you become non-resident in the UK for tax purposes, income, wherever generated or paid, will be liable to tax in your new country. Tax rates range from 15 per cent to 45 per cent in Spain, from 0 per cent to 40 per cent in France and from 10 per cent to 42 per cent in Portugal.

Experts say that for people with a mid-range retirement income there is little overall difference between the amount of tax you will pay in France, Italy, Spain or Portugal compared with the UK, but, depending on your personal circumstances, it may be beneficial to receive any UK income such as pension or interest on savings gross, without deduction of UK tax.

One of the less pleasant aspects of moving abroad could be finding yourself liable for wealth tax. Portugal and Italy have no wealth taxes but residents of France are taxed on the full value of their worldwide possessions each year at a rate starting at 0.55 per cent for assets of more than £750,000 (£510,000), rising to a maximum of 1.8 per cent a year for assets in excess of £15.5m. In Spain wealth tax starts at 0.2 per cent, although you get an allowance of £150,000 against your main home and £108,000 against other personal assets.

And consider your UK tax-free savings. Under UK law investments held within Peps, Tessas and Isas do not attract income or capital gains tax. However, this tax concession has no effect in France, Italy, Spain or Portugal, so it may be worth cashing in your Peps and Isas before you move abroad so that your capital gain is realised tax-free before you leave the UK. However, you should speak to your independent financial adviser (IFA) about whether the charges you may face on reinvesting the funds will outweigh any tax saving.

Some offshore investments known as personal portfolio bonds can be advantageous for people moving abroad. France, unlike Britain, does not charge capital gains tax on growth of funds realised from these bonds, but watch out for high charges.

If you own properties in Britain that you let to tenants, the income will be taxed in the UK and may also be taxed in your country of residence, but you can get a credit for the UK taxes paid so that you are not taxed twice on the same income. In Britain, letting agents are required to deduct basic rate tax of 22 per cent from the rent and send it to the Revenue. Where rent is paid directly to you, the Revenue may write to your tenants demanding that they send 22 per cent of the rent directly to them as a way of taking basic rate tax at source.

Pensions

You are eligible to receive your UK state pension and occupational pension in full if you move to another country within the European Union.

The good news is that within EU countries such as France, Spain and Portugal your UK state pension will continue to increase in line with inflation, which is not the case for people who retire to countries such as the United States, Australia or South Africa. If you are a non-UK resident, pension income will be taxed by the country in which you live.

In France there is also a social charge of 7.1 per cent Continued from page 1 in addition to the income tax on pensions. This is waived if you are receiving the UK state pension and you have completed a Form E121 from the DWP. The charge can affect people who retire early and are not yet eligible to draw their UK state pension.

Watch out if you move abroad before taking your pension. The ability to take 25 per cent of your pot as a tax-free lump sum is a concession available only to UK residents; if you become liable to tax in a country on the Continent before you start drawing your pension, you could find your lump sum taxed after all.

Benefits

If you are retiring to Europe, you may be able to claim benefits in that country. The benefits you receive in the UK may also be affected by your move abroad. For example, if you are receiving pension credits in the UK this ceases once you become a UK non-resident, but you can still claim incapacity benefit in some European countries. What is more, if you are already claiming your winter fuel allowance, you can claim this after you move to Europe. For further details get a copy of the DWP's guide Going Abroad and Social Security Benefits (GL29) or visit its website .

Currency risk

The chances are that most of your income will be paid in sterling yet all your future outgoings will be in euros.

That is why financial experts urge people emigrating from the UK to move as much of their non-pension assets into investments and savings accounts that are linked to the euro. You may think the 5 per cent you can earn on cash on deposit in the UK compares favourably with the 3.5 per cent you can get in the Eurozone, but that extra interest can be wiped out overnight if exchange rates move against you.

Jonathan Spring-Rice, a consultant at Towry Law, the IFA, says: "As soon as people move out of the UK they have to realise their future is inextricably linked to the euro. People should also ask themselves what they would do if currencies did shift against them, particularly if they are likely to have considerable fixed outgoings. A budget that works at today's exchange rates may not work tomorrow."

Bill Blevins of Blevins Franks, an IFA specialising in overseas retirement, reckons it is worth transferring pensions into a Sipp, which gives people greater control over their investments. "You invest in funds that are denominated in euros so your assets are matched with the currency of your residency," he says.

"It can cause problems if your £163;500,000 pension pot falls to £450,000 because of currency movements going against you."

You can ask for your pension to be paid into an overseas bank account, but check you are not being charged an exorbitant exchange rate. Specialist foreign exchange companies such as HIFX offer free monthly transfers and decent commission rates, and allow you to fix an exchange rate for up to 24 months to protect yourself against currency fluctuations for regular outgoings such as mortgage payments.

Wills and inheritance tax

Different countries treat inheritance in different ways and it pays to find out how your estate will be treated when you die.

When you retire abroad, you will need to make a new will to comply with local law. However, you will also need a UK will if you still own property in Britain.

In many continental countries, including Spain and France, your will can be overriden to make you provide for your children rather than giving your property to your spouse outright, so you may want to take specialist advice on how best to arrange your affairs.

In France, beneficiaries incur the inheritance tax charge, not the estate, while unrelated beneficiaries, including unmarried partners, are charged more than close family members. In Spain this rate can be as high as 84 per cent for unmarried partners; in France it is a flat rate of 60 per cent.

Once you become domiciled overseas you will be liable for UK inheritance tax only on property you hold here. This is paid at 40 per cent of everything above the IHT threshold, which currently stands at £285,000.

"Inheritance tax laws vary widely from country to country. For example, in Portugal IHT is only 10 per cent and there is no inheritance tax for bequests to spouses or descendants," says Mike Warburton, the senior tax partner at Grant Thornton, the accountant.

Health

It is essential to get a European Health Insurance Card (Ehic), the replacement for the E111, before moving abroad. It will give you access to free or cheap healthcare throughout the European Union, although this covers you only for the first six months of your stay.

You will then need to register with the social security system in the country you are moving to in order to benefit from their healthcare services. Visiting state hospitals and medical centres is free in Italy and Spain, whereas there can be a one-off charge for seeing a doctor in Portugal. France has the best healthcare system on the planet, according to the World Health Organisation, but you will be expected to pay up to 30 per cent of the cost of treatment, so you should consider taking out a private medical insurance policy to cover this potential cost.

Similarly, insurance in Spain, Portugal or Italy will enable you to get access to the best healthcare available if state options fall short of your expectations.

People who have serious conditions may find it difficult to obtain cover, so consult a specialist independent broker such as Medibroker about the best medical insurance.