Get packing

By STEPHEN WOMACK
Updated:

 

EVERY year, thousands of Britons wave goodbye to cold winters, NHS queues and traffic jams to retire abroad. Over the next six weeks, we explain the key issues involved in retiring to the sun. Pensions, property, investments, tax and healthcare all have to be considered. Firstly, how can pensions provide an income in the land of your dreams?

Clare and Allan Robinson are ready to start a new life in the sun. The couple are selling their house in Britain and buying land on the Portuguese island of Madeira to build a new home.

Allan, 65, a retired police officer, says: 'We have been thinking seriously about the move for two years. The weather is a big draw. The temperature there doesn't drop below 65 degrees.'

There are no firm rules in planning a retirement to the sun. Issues such as family, ability to speak a foreign language, connections with a particular nation and health will influence where people settle. Wealth also determines the decision, though David Marlow of retirement adviser The Annuity Bureau in Waterloo, central London, says: 'Cheaper living costs in some countries mean that you don't have to be a millionaire to retire there.'

Allan, from Southport, Lancashire, echoes this view. 'The cost of living in Madeira is certainly lower,' he says. 'Taxes, food and houses all seem to be much less than the UK. The money we get from selling our house should easily cover the cost of the land and construction of the new place.'

Strong growth in house prices in Britain means many pensioners can sell here, buy a good home abroad and still have cash left over. The Robinsons will also continue to enjoy an income from their savings. They plan to leave most of their investments in the UK under the control of adviser Adrian Shandley of Balmoral Associates, Southport.

Most people who retire to the sun will be entitled to some form of UK state pension. They can continue to claim this, even if they settle overseas permanently. According to the latest figures, more than 850,000 people are claiming the state pension abroad.

But to receive pension rises, claimants must live in the European Economic Area or one of 18 other countries with which the UK has a social security deal (see box below). Elsewhere, the pension may be frozen.

So, someone retiring to Australia or Canada who draws the full basic state pension of £72.50 a week will continue to receive this amount. But their income will not increase and rising living costs over the years will gradually reduce the value of their pension.

Similar rules apply to any additional state pension earned through Serps. It will increase only in one of the listed countries. Even then, the total value of a Serps pension may be capped by local benefit rules.

Those who spend part of the year overseas but remain UK residents will have their state pensions paid in full.

Personal and company pensions are less affected. They will continue to be paid in full. And overseas pensioners are entitled to any rises.

Annuity companies that will transfer money overseas free include Prudential, Scottish Equitable and Axa Sun Life. Those who levy a charge include Norwich Union and Eagle Star. Their charges of £15 for each overseas payment can eat into pension income.

Some company schemes will pay a pension only to a UK bank, while others will happily direct payments elsewhere.

Marlow says: 'The biggest issue for anyone retiring overseas with a UK pension is currency movements. The value of the pension will fluctuate with exchange rates. If the pound falls against their new currency, their income will fall, too.'

More sophisticated annuity buyers may try to balance some of this risk by picking an investment-linked annuity. Here, the income they get will depend on how well investments perform. By choosing to invest away from the UK and more in their new country, they can effectively hedge against some exchange rate movements.

Marlow says: 'This strategy will not appeal to everyone. You have to understand the risks, but it is one way to iron out exchange rate wrinkles.'

Alternatively, those who go overseas before drawing a private or company pension can try to get the whole fund transferred to a pension scheme in their new home country.

International transfers are a complex area. They must be approved by the Inland Revenue, which wants to make sure that the transfers are not being used to evade tax. Independent advice is essential.

• Next week: Property. How to buy overseas and what to do with your UK home.

Fact File: Retiring Abroad

Most watched Money videos