How to retire overseas
According to research by HSBC, the number of people who are approaching retirement and considering buying a foreign property has risen from 30% in 2006 to 38% - or 5.4 million – in 2014.
The majority (81%) would prefer to use their foreign property as a holiday home for up to six months a year, but this still indicates that up to one million people are considering retiring abroad.
Considering it is one thing, but actually making such a move takes a lot of time, planning and effort to make sure the outcome is good for everyone involved. Many people simply fall in love with a place they have visited once or twice on holiday, but taking a vacation is very different from living there full-time.
It is absolutely essential to do your homework on all aspects of moving to another country, from checking out the weather and atmosphere in and out of season, to assessing the health system. You'll need to organise your finances looking at tax, cost of living, the impact of foreign exchange on your money and your ability to earn income if you need to supplement your pension. All this needs to be done before you even consider looking for a property.
Can you afford it?
Most countries seem to have a far cheaper cost of living than the UK when you visit on holiday. The price of food, meals out, drinks and entertainment can be a lot less – an important consideration if you are living on a fixed retirement income.
But it's not just these expenses you need to consider. Write a list of the main things you spend money on and check the comparative costs in the UK and the country you intend to move to, as certain essentials may cost more abroad.
Research by the Post Office earlier this year showed someone driving 1,000 miles in the UK could expect to pay £204.85 for fuel. But in France the price rises to £236.10 and in Italy it's £242.42.
In Spain – the most popular destination for people buying a home abroad – petrol costs £197.14 for 1,000 miles, but the price has risen by 9p over the past year and could soon catch up with British prices.
Fix your exchange rate
Prices have risen throughout the eurozone thanks to one thing: the value of the euro compared to the pound. Before 2008 and the start of the financial crisis in the UK, expats living in Europe could expect to get €1.5 for every pound; but at the time of writing it was just €1.23.
Those living in Australia have suffered an even bigger drop, from Aus$2.5 to the pound to Aus $1.8. The financial crisis started a year earlier in the US and at one stage UK expats could get $2 to the pound, but the American economy began its recovery before the UK, and the exchange rate has now fallen to $1.50 to the pound.
Chris Saint, head of currency dealing for Hargreaves Lansdown, says such fluctuations can make life very difficult for UK expats, not only while buying their new home but also when they start living in their new country on a pension generated back in the UK. "Aspiring expats can reduce the impact of currency exchange fluctuations by forward-buying their currency for up to two years," he says.
This effectively fixes the rate at which you exchange your sterling and means that if the pound falls against the currency of your chosen country, you will be protected from a drop in value - very important if you are living on a tight budget.
Fixing the exchange rate can be done for one-off purchases, such as converting money to buy your home, or on a regular basis if you need to move your pension and other income from the UK to your new country each month.
Shop around for the best exchange rates and charges – given the amounts of money involved in a house purchase, it could save you thousands of pounds.
What will happen to your pension?
Many UK expats have run into problems with their state pension because of where they have chosen to live.
Pensioners living in the European Economic Area, Switzerland and some other countries that have a reciprocal social security agreement with the UK benefit from rises to the state pension in line with pensions in the UK. But 565,000 expats living in 123 – mostly Commonwealth – countries, including Canada, New Zealand and Australia, have not had any increase to their state pension since they emigrated. More than half of these live in Australia, where the government pays out about £71 million a year in means-tested assistance to help expats make ends meet.
The effect of freezing the state pension becomes more severe the longer you are retired. Geoff Dancer, who lives in Ottawa, Canada, qualified for 100% of the UK state pension in 1986, worth £38.30 a week then – and he gets the same amount today. His wife, Doris, receives even less because she worked part-time.
The International Consortium of British Pensioners (ICBP), a body fighting for equal rights for UK expat pensioners, estimates the couple have missed out on almost £40,000 in pension payments during the past 20 years because they live in a country without a reciprocal agreement.
The ICBP has called for the removal of clause 20 from the Pensions Bill, which continues the policy of freezing pensions for people who retire overseas in one of the affected countries.
The group argues the clause has a negative impact on the recipient's right to be free to choose his or her place of residence under the Human Rights Act. But the government has so far resisted pressure to remove clause 20, claiming its removal would cost the economy about £655 million a year.
Emigrants often misunderstand the tax they are liable to pay when they move overseas, according to Sabine Fichaux, head of marketing for HSBC Expat.
"Becoming a resident of one country while still having financial commitments in another can cause tax complications, and some people end up paying twice – once in the UK and once in their new country," she says.
Double taxation agreements, which enable you to offset tax paid in your new country against your bill in the UK, exist for many of the most popular destinations Brits move to, including Australia, France, Spain and the US.
However, there are plenty of other tax differences to catch you out, including inheritance tax, which varies considerably between countries. You may also have to pay capital gains tax when selling assets acquired before you left the UK, even if you sell them after moving abroad.
As the amount of tax you have to pay could have a make or break effect on your finances, it is essential to consult tax specialists, including in the country where you want to move.
Buying a property
As the horror stories emanating from Spain over the past few years have proved, you cannot be too careful when it comes to selecting your new home abroad. Thousands of UK expats have seen their homes demolished because the builder failed to secure planning permission or built illegally on green-belt land, while others have put down hefty deposits on off-plan properties, only for the developer to go bust.
Property values have also fallen in many areas of the world, making it difficult for some expats to move home if they change their minds. Jelena Cvjetkovic, international agency network manager for Savills, says in France and Italy, some areas have suffered price falls of up to 30%, while some properties in Spain have halved in value. Homes in Florida also plummeted in price, but have started to recover.
The problems have understandably made potential buyers very wary. "We found it very difficult to sell anything off-plan once the [economic] crisis started. Unless you are dealing with a reputable and well-backed developer, we would recommend you buy something that is already built," says Cvjetkovic.
People thinking of buying in a particular area should visit several times throughout the year to check they would be happy with the climate, culture and lifestyle both in and out of the main holiday seasons. They should also consider whether access to medical care, shops and local society is easy. While a remote property might be fine for a two-week holiday, it could prove problematic over the longer term.
Once you've settled on an area, find an estate agent that is reputable and preferably has offices both in the vicinity of where you want to move and in the UK. Ideally, you want an agent who has a good knowledge of local properties but also speaks good English. Check it is a member of the Federation of Overseas Property Developers, Agents and Consultants or the Association of International Property Professionals (aipp.org.uk).
Most importantly, appoint an independent lawyer, not one connected to the property or development you are buying, who understands both UK law and the law of the country in which you are buying, and is fluent in both languages.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
An off-plan property is one sold to the buyer before it has actually been built and so the prospective buyer relies heavily on architect drawings, scale models and the assurances of the property developer in order to “see” what they’re buying. For investors or speculators, in a rising market, buying off-plan means you buy at this year’s prices and, when you take possession, the market value will have increased. The biggest risks with off-plan are the developer will go bust or not complete the project or that the market will fall and the completed property will be worth less that the agreed purchase price.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.