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Expat Investor : September October 2009
RETIREMENT What you need to know about retiring abroad September/October 2009 EXPAT INVESTOR 7 movements which ultimately could force a return to the UK. Other considerations centre around how distinct a break to make from the UK. Some opt to keep hold of their UK property, perhaps letting it out, to retain a foothold in the UK market and provide a useful tool in case a return is ever required. Of course, there are tax implications associated with letting a property whilst living overseas so it makes sense to seek advice if this is decided upon. Another decision is whether to become a non-resident. Non- residents are not subject to UK income tax, but the rules in this area have undergone some significant changes in recent years, and non- residents do have to demonstrate a clear and distinct break with the UK. Again, advice from an expert is the best course of action when deciding on whether to adopt non- The number of UK citizens wanting to retire outside the UK continues to grow. However, the recent weakness of sterling and the current financial climate have caused some to put their plans on hold, while others reassess their financial planning to ensure it will be robust enough to stand the test of time. Here, we explain what to consider if you are planning a retirement overseas. Pensions -- good or bad? Pensions have not enjoyed a good press and many have questioned their use as an effective means of saving for retirement. The situation was not helped by the 2009 budget, which introduced tax relief restrictions for high earners. Despite the negative perceptions, most people consider pensions as the most cost and tax effective way of accumulating retirement funds. Tax relief, low access charges and the freedom to transfer pensions means they are still, and likely to remain, a core element of individual financial planning. Pension funds, other than the UK state pension, are linked to final salary or based on investments (money purchase). Where final salary schemes are adequately funded (which is by no means all) members will not have suffered due to falling investment values. On the other hand, money purchase members will generally have seen a sharp fall in the value of their pensions and will need to make adjustments accordingly. In this regard, it is important not to lay the blame at the pension door, as the pension concept and process are sound, but sadly economic conditions and associated investment returns have not been. For those considering retirement overseas and lucky enough to be entitled to final salary pensions, the situation is clearer. The sums are relatively straightforward provided a decision has been made about the retirement country and as long as advice has been taken about the tax implications for both pension and non-pension income. A point to note is that many people believe taxation in European countries, such as Spain and Portugal, will be higher than their UK liabilities. However, the differences in the tax systems mean that, with the right planning, the total taxation is often lower. A key planning requirement for those receiving final salary sterling pensions is that they convert their liquid investments into their local currency of expenditure as this will reduce the negative effects should sterling fall further in value. Failure to convert assets leaves expatriates highly exposed to currency Mark Davies, Retirement Planning Executive with The Fry Group, runs through the tax, pension and investment issues for those planning an overseas retirement. resident status. Money purchase pensions offer a range of options including annuity purchase, income drawdown and transfer to a Qualifying Recognised Offshore Pension Scheme (QROPS). Annuity purchase is the safest option, but currently annuity rates are very low and lock investors into a fixed sterling arrangement which dies with the member(s). Drawdown allows the member to take their income from an underlying portfolio, which importantly may be invested in the currency of the member's expenditure, but does require active management and can fluctuate in value. QROPS is another option for those with money purchase pensions. QROPS have a number of benefits including: investment into a single offshore scheme without tax penalties tax-free access to pension funds no multiple UK based pensions income can be paid in currency of choice Added to this list, of course is the reason that many expatriates simply wish to avoid leaving assets in the UK. Other assets The structuring of non-pension assets is equally important and, generally speaking, options should be identified as early as possible. For example, Assurance Vie contracts purchased while non-French resident, qualify immediately for long-term French tax breaks and they also offer additional inheritance tax benefits compared to contracts purchased once resident. Given the potential opportunities and pitfalls of retiring outside of the UK, it is vital to seek advice from a firm with relevant expertise of the tax rules in the country to which you are intending to locate. The current financial crisis has posed many questions; not least when and where best to retire to. Despite this, the key considerations remain unchanged for those retiring abroad; plan ahead and take the right advice!