Dreaming of retiring abroad? It’s more difficult than you think

It’s the time of the year people in the UK tend to start dreaming about retiring abroad. And, after a pretty dismal spring, the “soggy summer” predicted by the Met Office might just increase the frequency and intensity of those dreams.

Research from private bank Arbuthnot Latham has found that nearly three in five wealthy individuals in the UK are already considering relocating abroad, the main reason being a desire for an improved standard of living.

Wealth managers report most interest in Spain, France, Italy and Portugal. But pouring cold water on those dreams, they also say retiring abroad has become more difficult.

Countries have got better at changing tax regimes and closing loopholes. Plus, the backdrop of uncertain changes to tax and legal issues, stalled by the UK’s general election, is unhelpful to Britons who want to move to sunnier climes.

Before Brexit it was easy to help clients in Spain and Portugal with UK pensions who had gone to live abroad. Post-Brexit, no insurance company will touch annuities abroad with a barge pole

In April 2024 Spain’s council of ministers agreed to eliminate the golden visa. Once ratified, Brits will no longer be able to obtain residency in Spain simply by buying a property worth €500,000. Meanwhile, “people used to get excited about Portugal,” says Jason Porter, business development director at Blevins Franks, “but the advantages of the tax regime have fallen away for expats.”

There have always been complexities to navigate, from the practical to tax and legal issues.

For example, you’ll be able to buy and sell investments already on UK platforms, but good luck adding or withdrawing funds without a UK bank account. You may also need to replace your Isas with offshore bonds.

One area where things go badly wrong is wills. In England and Wales we have testamentary freedom, where assets can be left to any beneficiary you want, but in Spain, France and Portugal there are systems of protected heirs, where children and grandchildren get prescribed portions.

Another well-reported issue is the ridiculous disparity whereby about 500,000 of the 1.2mn state pension recipients living abroad do not receive the increases to their state pension guaranteed by the triple lock. While payments increase each year if you live in the European Economic Area; in others — including Canada and New Zealand — they’re frozen.

Whether it’s the state pension, investments or tax, those wanting to retire abroad need to watch out: “There’s always a catch wherever you go,” says David Denton, consultant at wealth manager Quilter Cheviot.

In most cases, advisers say you should take your 25 per cent tax-free lump sum from your pension and do other pension planning before you leave the UK. Doing it afterwards could cost more from a tax angle, plus you won’t be able to buy an annuity after you leave.

“Before Brexit it was easy to help clients in Spain and Portugal with UK pensions who had gone to live abroad. All you needed was a UK bank account,” says annuity expert William Burrows. “Post-Brexit, no insurance company will touch annuities abroad with a barge pole.”

The Association of British Insurers says different regulatory regimes in the countries where people choose to retire can prevent insurers from being able to offer an annuity to someone living abroad.

Unfortunately, HM Revenue & Customs is advising that pension planning that involves transfers to a qualifying recognised overseas pension scheme (Qrops) — a common type of pension planning for expats — is on hold. Putting it politely, one wealth manager said this is because “legislation around the lifetime allowance abolition was not written very well”. The result is people who transfer to overseas pensions could be subject to a double tax charge.

“This is an incredibly complicated area that is in a state of flux, as the new legislation remains incomplete,” says Porter. “We are still expecting further revisions to the law, but this has been complicated by the upcoming election — and if it gets a majority, Labour’s proposed reintroduction of the lifetime allowance.”

Then there’s the issue of domicile, also put on hold by the announcement of a general election.

For decades, expats have struggled to shed their UK domicile, which means they are liable for UK inheritance tax (IHT), coming up against what wealth advisers call “the Richard Burton problem”. The actor wished to be domiciled in Switzerland, where he lived for 27 years and where, after he died in 1984, he was buried. At HMRC, his estate’s case wasn’t helped by reports that the coffin was draped in the Welsh flag and that he was interred with a copy of Dylan Thomas’s poetry. But what really sealed the deal was Burtons’ purchase, many years earlier, of burial plots in Wales. As a result his worldwide estate was decreed subject to UK IHT.

In March, the government announced it intends to move IHT to a residence-based system, subject to consultation, with the proposal that you can shed domicile 10 years after leaving the UK. Nick Reeves, partner, financial planning at Evelyn Partners, says: “It could become more attractive to retire overseas, depending on what the new rules look like.”

The earliest these plans could be put back on track is the autumn and it’s not certain that a future Labour government would take up the mantle.

No wonder expatriate advisers compare their work to “playing three-dimensional chess”.

This is where financial advisers should earn their crust. The problem is, knowledge and expertise is thin on the ground because, since Brexit, UK advisers have been limited in their ability to provide services to clients in the EU.

Before Brexit, it was possible for financial firms to “passport” their services into other EU countries. This ended with the UK’s departure, so unless your UK adviser has taken the time, effort and expense of getting set up and regulated in your country of residence, you’ll struggle to find help.

And finding a good one overseas is notoriously difficult. “A lot of advisers abroad aren’t qualified to UK standards, and they don’t know how to plan around the investments you have from the UK,” warns Denton.

Some UK advice firms will refer you to overseas companies. But don’t expect to have the same experience or consumer protections — the UK is good at these compared with other countries.

And expect to pay more for the advice. Navigating changing rules and taxation in two countries doesn’t come cheap.

Plus, Reeves warns: “Most European advisers run a commission model — often charging commissions upfront — that was knocked on the head by regulators in the UK.” Advice under this fee structure may feel opaque and uncomfortable, but with so much uncertainty around you may be more at risk without it.

Moira O’Neill is a freelance money and investment writer. X: @MoiraONeill, Instagram @MoiraOnMoney, email: moira.o’neill@ft.com