Pensions, Taxes and Retiring Abroad

Summary: As more British decide that a relaxing lifestyle in the sun is their perfect way to spend their retirement years, we look at the favourite destinations for UK's retirees.

As more British decide that a relaxing lifestyle in the sun is their perfect way to spend their retirement years, we look at the favourite destinations for UK’s retirees.

Official figures for where the British are retiring abroad shows that the number one destination is Australia with nearly 240,000 British citizens having chosen to retire there already.  Canada is second on the retirement destination list with 150,000 Brits now living there according to the UK’s Department of Work and Pensions.

Other favourites include Spain, France and Cyprus - all very popular destinations for UK retirees.  Those who aren’t too worried about long flights venture to the US, especially Florida; and now South Africa has a strong presence of retired British citizens as well.

One dilemma that affects many retirees abroad is overcoming the fact that your state pension may be frozen.  Moving to countries like Canada, Australia or South Africa will see your pension frozen with immediate effect.  Approximately 550,000 retires abroad have had their pensions frozen and see their incomes reduce in real terms every year against inflationary effects.

While the legal battle goes on to reverse what is seen as the unfair and illogical practice of freezing the pensions of those who decide to retire abroad, it doesn’t seem that any changes are about to be made soon, and anyone considering overseas retirement should ensure that they have sufficient funds to withstand the affects of frozen pension erosion.

The cost of rectifying the situation could be huge as many pensioners will be entitled to significant amounts of pension arrears; this is probably the single most significant factor delaying changes in the law.

Another pitfall to be aware of in countries such as Spain is the fact that they make it a requirement to pay both state and federal taxes on pension income which potentially has an equally negative affect on a retiree’s income.

One solution that some astute retirees use and one that you might like to consider in the future is to maintain a main residence in the UK and take advantage of the current spate of cheap flights that are available and only spend enough time in the second home in the sun to keep tans well topped up without falling fowl of additional taxes or frozen pension traps.

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