Retire carefree and cash-rich

Thursday, July 23, 2009

Retire carefree and cash-rich

The plunging pound has decimated the standard of living for many British retirees living overseas. Back in 2000 one Euro cost around 58 pence; today it costs around 89 pence. And although some UK retirees are relatively well off and are able to weather the currency crisis, many arent so lucky.

"The vast majority have been hit by a double whammy of falling sterling, down nearly 30 per cent in a year,and also the sharp rise in the cost of living", says Mark O'Sullivan from exchange experts Currencies Direct. "Many people are actually worse off by about 40 per cent than the year before. I dont see sterling falling much further, but peoples buying power has been sharply eroded, and it could take perhaps 18-24 months before sterling begins to recover." Stark words indeed. However, the plummeting pound does not mean you should ditch plans to retire abroad. It does mean, however, that you should take great care when choosing how you handle the transition.

One important potential pitfall concerns the value of state pensions. In some non-EU countries like Canada and Australia, your state pension will no be automatically updated with inflation as the years pass. In practical terms this means that if your state pension, which is always paid in sterling, is worth 100 a week, it could be frozen for the next 30 years at this amount, leaving you with less money to live on as the years pass.

According to the Department for Work and Pensions, the average value of a British pension being paid in Australia is currently just 30 a week compared to 79 in Spain and 76 in France. So it's worth taking-and paying for-professional and legal advice,especially as our lives grow increasingly longer.

Such risks shouldn't deter you from your dream of retiring overseas,however. It's still possible so spend your golden years abroad, despite the tough economic conditions out there.

In the following pages we outline four different ways you could use your properties in the UK and abroad to help subsidise your pension or income overseas.

Option No. 1

You sell your UK home, buy a cheaper property abroad and invest the balance for regular income

This route means that you make a clean break with the UK completely. It's also the most popular route by some margin. This is how it works. Say, for example, you sell a 300,000 property in the UK and buy a property in the Bordeaux region of France for 200,000 (just under 180,00). This leaves you with approximately 120,000 to invest. With the current low interest rates, however,it is difficult to find an investment that will pay a reasonable return and therefore income.

"If you can find an investment that would pay you five percent, that would give you an income of 6,000 a year" says John Howell from property legal specialists The International Law Partnership. "However, with current interest rates so low, then you're looking at nearer two-three percent." Howell says that for certain types of French tax efficient investments , income can be taxed in your favour. For example, one area of the French taxation system that can work well for British retirees is the Assurance Vie policy, which, if structured correctly, will not be classified as income. Such a policy can allow you to invest in a range of areas such as government bonds and unit trusts in different currencies so you can spread your assets-and your risk profile-around.

On the other hand, you could opt instead to sink your 180,000 into a Turkish property, where not only would you get more for your money (Turkey has not adopted the euro yet), but the much higher domestic interest rates there means youll get a higher investment return, too. "However," warns John Howell, "this means that if the Turkish lira becomes stronger, then your income would be lower." In other words, any investment decision you make should take currency fluctuations into account.

Option No. 2

You buy a home abroad but keep your home in the UK (with no mortgage on it) and let it out for rental income

On the surface, this sounds straightforward. For example, you might own a 375,000 four-bedroom house in a university town like Leeds or York, and buy a place in Spain to live in. As your property is in a university town it means youre unlikely to have problems finding tenants, and when rented the property will supply you with an income of 1,000 a month. However, you will need to allow for periods when the property is empty Bill Blevins, managing director at expatriate tax and pensions planning company Blevins Franks says if you are a married couple, you could use your personal tax allowances (currently 6,475 each) to ensure you dont pay tax on this income. "But it would affect how much tax you pay in the new country you now reside in. However, even if no tax is paid on this income, then youve got to look out for currency fluctuation issues. Are you renting your UK home out furnished or unfurnished? Who will look after the property when youre not there? You may need to find an agent to do that but that is likely to cost you around 15 per cent of your rental income in fees."

If you choose this route, it's vital that you ensure there is plenty of demand for your type of property. Smaller properties in highly desirable city-centre locations, especially when there is limited good-quality accommodation, are highly sought after. Most people, though, dont own properties that make great rental propositions, cautions one adviser. It also never really allows you to make a break with the past. In addition, if it doesnt rent, and is available for your use, the UK tax authorities may take the view that you havent actually left the UK, especially if you return to stay in the property too often or for too long.

Option No. 3

You sell your home in the UK and with the proceeds buy a home abroad and a buy-to-let, also abroad.

This could make sense if you were keen on letting property for income, but would rather manage a buy-to-let property thats perhaps close to your new home abroad. For example, lets say you sell a 500,000 home and buy a property overseas in Portugal for 300,000, leaving you with approximately 200,000 to invest in another property nearby.

"Most people doing this would know the area backwards," says Matthew Weston, a partner at Blevins Franks Euro Division. But timing is terribly important, given the value of the pound currently. I would recommend holding back, especially when youre transferring large sums of money for two properties. Despite house prices falling in Europe, Weston says that in prime locations on the Portuguese Algarve, where space for new developments is limited and planning controls are tight, prices are likely to remain constant. "Portugal rents well over the summer generally.Rents of more than 700 [625] a week are possible."

Option No.4

You sell your home in the UK and with the proceeds purchase a buy-to-let in the UK and a home abroad (with no mortgage on it)

A glaring danger with this route is currency fluctuations, especially if you have to transfer a certain amount of euros each month back to a UK account to pay the mortgage on the British property. Youre also generating income in sterling although your overall expenditure is in euros so youreincurring more currency charges and risk. Think hard about whether this option is the right one, advises John Howell of The International Law Partnership. In principle, this could work, but you have to ask why would you really want to purchase a buy-to-let in the UK? Why not Miami or Marbella? The only logic for buying a buy-to-let anywhere is that it should outperform the market in the long term. Most think a British buy-to-let is an easy option without really thinking it through.

Bear in mind that the UK doesnt tax non-residents on capital gains on UK assets. So if you leave the UK and sell your main property provided that you remain a non-resident for five consecutive complete years, spending less than three months in the UK a year you will be treated as a non-resident for CGT issues, says Bill Blevins from Blevins Franks. "However, if you were to sell your property as resident in your new adopted country, this asset would be taxable as a gain. In addition, the income remains taxable in the UK, so you will have to complete UK tax returns each year, even if you have no tax to pay." This income will also be taxable in your new country of residence and subject to any double tax treaty relief. You also have to think about taxes on selling the property, both in the UK and your country of residence, and consider what will happen when you sell, and where tax will be paid. It can be a complicated option.

Points to remember

Investigate tax treatments thoroughly.

For example,some headline tax rates in some countries, like France, are high. But in practice, for most modest investors,the tax regime can be benign.

  • ISAs, PEPs and other investments are tax-free in the UK but the income and gains generated are taxable in your new country if you move abroad. Premium bond winnings also become taxable.
  • British pensioners still receive the winter fuel allowance if entitled to it before leaving the UK even in sunny Spain!

    Case study

    Strong euro delays dream home for retirement

    In 2005 the Willshers bought two acres of land in Spain with plans to build a house on it but the strong euro has hit their building progress and their living costs.
    Kay Willesher's house
    Kay Willsher, 61, moved to the Extremadura region of Spain in 2005 when 1 bought approximately 1.5. She and husband Stewart bought two acres of land for approximately 165,000 (110,000 then) and have since spent 160,000 (142,857) building a house on the land. The slide in the pound has hit their house-building costs and their living costs. Willsher, who uses a Halifax variable rate web saver account, says her state pension has been reduced considerably. It used to be almost 800 (714) a month but last month [March] it went down to 500 (446). I have a small private pension, and we have additional savings in an offshore account. Were not struggling but we are much more watchful with money."

    The Willshers pay just 120 (107) in council taxes a year, but oil central heating is around 900 (803) per year,an expense made more expensive by the rising euro. Overall, they say they would still have made the move abroad had they known the euro would hit their expenses."But we might have not committed so much on a big capital spend on the new house. We might have downsized our plans a bit more."

    State pension payouts vary a lot


    According to the latest figures available from the UKs Department for Work and Pensions, the British Government pays out an average 79 a week in state pensions to 91,000 people in Spain, an average 76 to 46,000 expats in France and just 32 to almost 250,000 Brits in Australia. In 2009-2010, the full basic state pension is 95.25 a week for a single person and 152.30 a week for a couple, but your circumstances may affect the amount you get.

    The most recent up-rating of the British basic state pension was five per cent on 6 April 2009. Annual up-ratings of the state pensionare paid to UK state pension recipients resident in Europe, Switzerland and countries where there are reciprocal social security agreements, which allow for increases to be paid. The state pension is frozen everywhere else, including Australia and Canada. http://www.dwp.gov.uk

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A Place In The Sun