We look forward to retirement as a relaxing, rewarding period of our lives when we can take a step back from the breakneck speed of working life. Expats choose to make the most of this pace of life to relocate to sunnier climes and reap the rewards of their years of hard work.
However, how can you plan to ensure you have the resources and income to make the most of your retirement? Just how much money do you need to retire abroad?
Calculating Retirement Living Expenses
Begin by trying to work out how much income you need to sustain your quality of life. Try to break it down into categories of spend, as a way to help quantify your needs.
Particularly if you are moving abroad, take into consideration the exchange rate and the costs of your relocation. What is the cost of living like in your new home? Are there additional expenses involved in your relocation that you need to budget for?
Non-discretionary expenses are crucial costs. This includes rent or mortgage payments, basic ongoing living expenses, debts or lending repayments and anticipated tax liabilities.
These costs will include the cost of living; utilities, food, essential supplies – and what you feel is essential to be able to enjoy your retirement in style.
If you are unsure of the costs of living or things like fuel and food prices in your new country, do some research and join some expat blogs to help you understand what your weekly and monthly outgoings will look like.
Discretionary expenses include spending that is not necessarily essential, but that you would like to budget for. This could include travel, holidays, charitable causes, luxury purchases and home renovations.
Purchasing a new home in a warm, relaxed environment is the retirement ideal! Make sure you have researched any professional costs to either purchase a new property or sell your UK home, plan how many times you would like to travel back to the UK each year and how much budget this requires, and other larger expenses such as purchasing a new car abroad.
Considering your income requirements is the first step to planning effectively for retirement. Take into account any other significant changes in circumstances that you may have planned, such as plans to support family members with education costs.
Several factors will impact the value of your retirement income and savings:
- Investment growth
- Rates of inflation
- Annuity rates
As a rough indicator, pension provider Aviva estimates that to receive around £20,000 per year inclusive of a state pension, a retiree at age 65 requires an investment pot of £250,000 at current annuity rates.
Learning about your pension income is a crucial aspect to planning your relocation; you need to know how much you can expect to receive, how often, and whether that income is likely to change in the future.
Some countries may have different taxation rules than you are used to, so if you are in any doubt about your pension income or would like assistance with effectively planning for your relocation and managing your portfolio to deliver the quality of living you are expecting, you should seek professional support and guidance.
The Impact of Annuity Rates
Annuity rates determine the regular income receivable from your pension plan. An annuity rate is shown as the value receivable per annum against every £100,000 of investment. For example, an annuity rate of 5% means that you receive £5,000 per year for every £100k invested.
Annuity rates are important to understand when planning for a significant lifestyle change such as relocation – this is because they determine how much regular pension income you will receive, which is often the starting point for budgeting for a new life in the sun!
Types of Pension
There are several types of pension scheme and you may hold multiple pension schemes, so need to understand the expected income receivable from each.
With the introduction of auto-enrolment pension schemes, more employees than ever have a workplace scheme, with contributions automatically deducted at source.
Your pension provider can provide you with a pension value estimate, and so if you are unclear on any aspect of your workplace pension and the payable value on retirement, get in touch with your HR department or scheme provider.
Private Pension Schemes
A private pension scheme is one you choose to take out independently. There are many pension products on the market, and the right scheme for you depends on how much you can invest, your acceptable level of risk, and the required income you need to supplement your other pension scheme income.
UK retirees are eligible to receive the statement pension on reaching retirement age provided they have made sufficient National Insurance contributions. Currently, this is set to a maximum of £129.20 per week.
Knowing which pension type(s) you have is essential; and whether you will be eligible to continue receiving your State Pension when you move abroad.
When you are depending on your pension to provide some of your ongoing income to support your lifestyle, you need to know how reliable that income is, and how it changes over time.
Other Sources of Retirement Income
If you hold savings accounts, check the availability of accessing funds, and whether there are alternative investment products that may provide a higher return on investment in terms of interest.
Individual Savings Accounts (ISAs) have an annual limit on the amount you can pay in. The benefit is that ISAs provide a tax-free savings mechanism, which makes them tax-efficient.
The tax implications of drawing on your savings can make a significant difference to the net value you will receive, so check what tax liabilities are payable on your savings products and whether these are payable in your new country of residence, in the UK, or even in both before planning when to drawdown and how to allocate these funds.
Holding property assets to provide rental income or investing in the buy to let property market is another way to generate regular income to help provide for your retirement.
You should consider what level of risk you are willing to take since the market value of a property can vary considerably over time.
Many clients are faced with the choice of whether to retain their UK properties as a source of rental income or sell their homes to provide capital for a new property investment overseas.
The duties, fees and costs of purchasing a new home outside of the UK depend on the tax rules in that jurisdiction, so understanding those associated costs – and what net revenue the sale of your home should generate – is critical.
Stocks and Shares
Should you hold business assets such as stocks and shares, these may provide regular income in the form of dividends. When calculating your future income, make sure you take into consideration any tax liabilities and allowances relating to dividend income.
Since tax rules and legislations vary between countries you will need to know what obligations will arise when you receive dividends.
These often depend on your residence circumstances, and careful planning is required to ensure that you don’t duplicate your tax liability in both the UK and your new home country.
As an alternative to traditional investments and savings, taxable investment accounts are investment assets which do not offer any tax relief. However, investment options tend to be more flexible and can provide another income stream.
Be conscious of the risks involved with any investment, and compare this against the projected rate of return before relying on a high risk / high yield investment as an insurance policy for your retirement.
The taxation issue also applies here; you must understand what the tax regulations in your new country of residence mean, how these will impact your investment income, and how to strategically plan to efficiently manage your tax liabilities.
Retirement – Looking Ahead
Saving for your retirement is crucial to guarantee you will be able to relax and enjoy this time in the lifestyle you expect. There are multiple options for making investments, contributing to pension schemes, and planning for regular income in advance.
Choosing to relocate abroad is a popular choice since it offers the quality of life and relaxed pace of living we all aspire to, along with a gentler climate and sociable community. Understanding the costs in doing so is the first step to ensuring that your retirement journey is an enjoyable one and that your asset portfolio is geared to sustain your income streams for years to come.
If you need help planning for retirement, making sense of the tax liabilities in a different country, understanding the value of your pension schemes or deciding how to manage your property portfolio, get in touch. Knowing that you are in safe hands and that your future income is assured provides peace of mind so that you can focus on your retirement.
Chase Buchanan is a highly regulated wealth management company, specialising in providing global finance solutions for those with a global lifestyle.