An expatriate retirement is a popular option amongst UK retirees. Some of the most common reasons for heading overseas include higher living standards at low costs, a warmer and more pleasant climate than the UK can offer, and access to world-class beaches, and recent increases in the flexibility of pensions have made these attractions more accessible than ever.
Some of the most popular destinations for British expat retirees and their key features include:
Spain, both in reputation and practice, is the star retirement destination for British expats. Properties there are more affordable than in the UK, and with recovery from the impact of the recession still in its early stages this is especially true right now. The cost of living is also relatively good and generally lower than in the UK.
The biggest draw for Spain, however, is probably the abundance of attractive beaches around much of the country's coastline. Both state and occupational pensions are taxed under general income rules, at an 18% standard and 45% higher rate. Lump sums from pensions, however, are taxable, meaning that it is best to take these before leaving the UK.
Another sunny Mediterranean country, Italy also features among the favourite retirement destinations of the UK's senior expats. Cost of living is higher than in Spain, but cheaper than the UK in some areas at least, and much the same principle applies to property prices. Pensions, including lump sums, are subject to income tax at rates of 23% and 43%. There may be additional local taxes, depending on where you live.
Some UK expats prefer to retire somewhere that is closer to home, both geographically and culturally. This is where Ireland comes in. Some key living costs are modestly yet noticeably lower than in the UK, and property prices are more affordable than they are in much of the UK as well.
Irish income tax, for which pensions are eligible like any other source of income, is set at 20% for the standard rate and 40% for higher rate taxpayers. Your 25% lump sum from your pension pot, if you choose to take it, will remain tax-free just as it would in the UK.
Germany offers a cost of living that is somewhat lower than the UK. Properties are rather more expensive than some other popular destinations, but certainly not above UK levels. Income tax for pensions is more complex than in most jurisdictions, but bands range from 0% (besides a 5.5% surcharge applied as standard at all levels) up to 45%. Factors used to decide the tax status include the pension type and the role employer contributions have paid in building up the pot.
Croatia is increasingly popular as a destination for retiring UK expats, thanks to growing global appreciation of its Mediterranean coast, beautiful scenery, and historic towns. Besides these attractions, it offers retiring Britain's the chance to access properties that are very cheap compared to those in the UK, and a quality of life which also comes much cheaper than it would at home.
Previously, it also offered a 0% rate of tax for pensions from abroad, but last year this changed with the signing of a double taxation treaty. Pensions are now eligible for standard Croatian income tax, ranging from 12-40%.