This piece first appeared in Saga Magazine in March 2006
The text here may not be identical to the published text

 

A rough guide to living abroad

There is nothing like a cold winter to make thoughts turn to moving abroad. More than a million UK pensioners do live in another country. But the practicalities – by which of course I mean money – have to be thought about carefully.

The first thing to sort out is whether you will be allowed to live in the country you choose. There should not be a problem in the 24 other states in the EU. You can move there for work or retirement, though you will need a residence permit and if you want to retire to an EU country where you have never worked you may be asked to show that you have sufficient means to keep yourself. Countries outside the EU will usually have restrictions on foreign nationals taking up residence. Even if your children or other relatives already live there, you may not have the right to join them permanently.

State pension
The state retirement pension, bereavement allowance and widow’s pension can be paid anywhere in the world. But in most countries they are frozen at the rate first paid abroad. So if you go to live in Canada, for example, your pension will not go up each April but will stay at its current rate for as long as you live there. So in 20 years you will still be paid the basic pension of £82.05 a week while people in the UK would be getting around £138 a week, if inflation stays around 2.5% a year. If you live another 30 years they would be getting more than twice as much as you – just because you chose to live in the wrong country.

The campaign to get pensions unfrozen has been going on for nearly 20 years. But after recent defeats in both the courts and parliament it seems unlikely that the rules will change in the near future. Perhaps the best hope is that if the Government radically reforms the state pension – as recommended in December by Lord Turner’s Pensions Commission – this question may also be addressed. But with the cost of unfreezing pensions around the world put at £400 million a year it is something the Government has consistently refused to consider.

UK pensioners living in 47 countries do get their UK pension increased each year. They include almost all of Europe and Scandanavia and half a dozen overseas countries including the USA, Jamaica, Israel and Philippines. But in the big old Commonwealth countries – Australia, Canada, South Africa, and New Zealand – and everywhere else in the world the state pension is frozen at the rate when it was first paid there.

If you return to the UK for a holiday then your pension should be paid at the full unfrozen rate for every week you are here.

Other benefits
Very few other state benefits can be paid outside the UK. However war disablement pension and industrial injuries disablement benefit (and their widow’s benefits) can be paid everywhere and are increased annually. Other disability benefits are not paid if you go to live abroad, nor are means-tested benefits. So if you get Pension Credit or council tax benefit they will stop. The winter fuel payment can be paid in the EU and in a very few other countries as long as you qualified and first claimed it in the UK.

Tax
Once you start living in another country you become liable to its tax laws. In most countries in the world you tax is due on your income anywhere in the world. If you still have income arising in the UK – for example from savings or investments or from a company or private pension – then you will remain liable to tax on it in the UK even if you are not resident in the UK.

Normally you will not have to pay income tax twice – once in the UK and once in your new country – because Britain has ‘double taxation’ agreements with most other countries in the world which ensure you are taxed in only one country.

If you have savings in a UK bank or building society then you can apply to have the interest paid gross, without tax deducted at 20%. You do that on form R105. The income will then be taxed in the country where you live. Interest rates paid on savings are generally higher in the UK than in Europe and the USA so it may be worth keeping money here and paying tax on it where you live. If you have rent from a property in the UK the net profits will be taxable here under almost all circumstances.

If you have a pension paid by an ex-employer or an annuity from a UK insurance company the income will be taxed in the UK. But if you live in a country with a double taxation agreement with the UK then you can apply to have the pension or annuity paid gross. It will of course then be taxable in the country where you live. Some scheme will only pay the pension into a UK bank. Others may charge for sending it abroad.

If you live permanently abroad then you can still keep money in a tax-free ISA but you cannot add any more to it. If you have income that is taxable in the UK you can make use of your personal tax allowance in the normal way.

You should be careful about returning to the UK for long periods. If you spend a total of 364 days in the UK over four tax years – or 183 days in any one tax year – then the Revenue in the UK you will consider you a UK resident and tax you on your worldwide income. The country where you live will have its own rules and you may well be liable for tax there too.

In some countries, including some in Europe, there is an annual wealth tax which can come as a surprise to many Britons living abroad. It is very important to make a will in the country you live. Inheritance Tax can be much more expensive than it is here and in many countries legacies between husbands and wives – or civil partners – are not exempt from tax as they are under UK law. If you still have property in the UK then it may be liable to Inheritance Tax here as well. Buildings and land, shares, and savings held in Sterling may be liable to Inheritance Tax here. Unit trusts and foreign currency held here are normally exempt. There are some double taxation agreements that cover Inheritance Tax but even if there is not one with the country where you live there are rules to reduce the tax due if you are liable to it in both countries.

Living costs
Income arising in the UK will normally be in Sterling and you will have to pay the cost of converting it to the local currency. However, your state pension can be paid direct into a bank in local currency without charges and at competitive exchange rates. You will also have to make sure that you pay whatever state or private insurance is needed to give you adequate health care. You may feel fully fit when you leave the UK but ten or twenty years later you may find you need expensive treatment with no NHS to fall back on. In some countries paying for health insurance will be a condition of living there.

Property
Laws relating to owning real property – a house or flat – are different in every country. It is essential that you get good local legal advice from someone unconnected with the sale before you buy abroad. Many people have bought property in nearby and civilised countries only to find that they have no proper title to it or that the property was built without permission and has to be pulled down. Some countries charge tax on the profit if you sell your home even if you use the proceeds to buy another. You may have to pay an annual wealth tax on the value of your home and make sure that if you die your heirs will be able to afford the local inheritance tax that may be due.

Finally before you go to live in another country remember that a place that is good for a holiday is not necessarily a great place to live.

Further information

Tax
IHT18 Inheritance tax – Foreign aspects
IR120 Residents and non-residents. Liability to pay tax in the UK.
IR138 Living or Retiring Abroad
Revenue Centre for non-residents 0115 974 0000 or 0151 472 6000
www.inlandrevenue.gov.uk

Benefits
GL29 Going abroad and social security benefits
Department for Work and Pensions International Pension Centre 0191 218 7777
www.dwp.gov.uk

Europe
http://europa.eu.int/youreurope/index_en.html

March 2006

 


All material on these pages is © Paul Lewis 2006