Taxing Matters

Anyone retiring overseas can look forward to a warmer climate, slower pace of life and the opportunity to experience life in a new country.

Before you decide where to move to, be sure you've considered the overall financial implications of your chosen destination. It sounds obvious but it is important to cut your cloth proportionate to your ability to pay, based on the lifestyle you wish to have.

Taxation rates
When considering a retirement destination, clearly the headline rates of taxation have some relevance, as does the overall tax burden. Remember though that in most cases the headline rates are not what people coming up to retirement should be focusing on. Not least because the amount of tax you actually pay, much like during your working life, is dependent on the source of that income and the level of income that you enjoy.

Clearly the more modest your income the lower the tax, but irrespective of income and wealth it is possible, with the correct planning, to pay lower rates of taxation than the headline rates suggest.

Comparing tax systems by looking at headline rates may seem relevant, however, for anyone looking to retire to a new country, their sources of and levels of income are ultimately what determine liabilities. A single person with £25,000 per annum of taxable income, would be liable to different tax rates depending on the country they choose to retire, as per the table below. Calculations do not take account of personal deductions due to the broad ranging variations in regions. For example, Spain allows personal allowances plus additional deductions based on allowable expenditure, whereas in Portugal and Italy net tax liabilities are calculated solely on allowable spending deductions claimed.

Another factor to consider when thinking about the fiscal implications of a move abroad is that if you are in receipt of a UK state pension and resident in Australia or a number of other countries, the UK does not increase the pension annually and is frozen at the date you leave the UK, making it fully exposed to the ravages of inflation over time.

When considering places to retire the European tax havens remain popular. Both Andorra and Monaco offer zero
personal income tax on pensions or savings income. Importantly, if you are in receipt of a UK company pension, it is important to check whether or not the UK has a double taxation treaty with the country, because if there is no treaty in existence then income tax will be taken on your UK pension at UK rates, despite the fact you are living elsewhere in the world. In Spain, for example, the headline rate of income tax is 47 per cent, which is higher than France at 40 per cent. Yet in France social charges are added to many sources of income, including pension and savings income, pushing the overall burden into a much higher level than the headline rate suggests. Also it is worth noting that France has a 'wealth tax' adding to the total state tax take.

Another key factor to consider is whether your income is derived from pension or from savings. For example, returning to Spain, the top rate of income tax there is 47 per cent, which is applicable when income is broadly above €35,000, after allowances, yet the top rate of savings tax is capped at 21 per cent, which generally people find acceptable. It is worth noting that if our expat in Spain had a combination of pension income and savings income and after deducting personal allowances the actual liability may be less than £4,000.

Exchange rates
It is vital that as many of your assets as possible are placed into the currency of your future expenditure, and within a timely fashion. Britons are naturally attached to Sterling and many find it hard to fully commit to another currency. Failure to hedge your currency risk however can be costly, as many Brits retired in the Eurozone have found over the last three years due to the fall in value of Sterling relative to the Euro.

One example of the importance of the correct currency exposure relates to pensions. Many people from the UK have employment linked pensions that are fixed in Sterling as is the UK state pension. There are however alternatives for those relocating overseas including transferring your pension to an offshore scheme where it is much more straightforward to invest the money in the currency of expenditure. This is also the case if choosing to relocate to a more exotic destination where the currency is set to appreciate against Western currencies over a period of years – so you'll want to protect the purchasing power of your pension and savings income.

Words: Mark Davies
Finally, if you are just retired and plan to do some travelling before settling down again, it is perfectly legitimate to become “fiscally nomadic”. This means that you do not spend enough days in any one country to be liable to pay tax to that state. After all, why pay tax when you don't have to?