Anyone recently retired or approaching retirement is entering a new and exciting phase in life. While some worry retirement will be boring, many embrace the freedom it offers. If you have chosen to retire in Portugal, you probably fall into the latter category!
Portugal certainly offers a beneficial lifestyle for retired expatriates, but long-term financial security is crucial to help you enjoy your retirement years. To achieve this, you need to take a good look at your finances and the way you hold your assets. Your situation is totally different now from your working days in the UK, so be prepared to make some adjustments.
Savings and investments
You may have built up a successful portfolio of savings and investments over your working life, but your circumstances and objectives were different then. With a regular salary coming in, you could afford to take more risk when choosing investments and focus more on growth.
Many retirees, however, are looking for income, whether it is receiving regular payments or taking ad hoc withdrawals. Besides planning for that, you need to protect the capital that generates the income, so you have to be careful about managing risk. You should aim to earn at least enough capital growth to keep pace with inflation over time to help maintain your spending power throughout retirement.
It’s a fine balance. The starting point is to obtain an objective assessment of your risk tolerance. Together with a good understanding of your aims, circumstances, needs and time horizon, this is key to ensuring your portfolio is suitable for you. In any case, diversification is central to managing risk within your defined tolerance.
All that free time in retirement costs money! You can help maximise your income through strategic tax planning. How you hold savings and investments can make a significant difference to retirement income.
Note that UK tax planning is unlikely to be effective in Portugal. ISAs and UK bank interest, for example, become fully taxable for Portuguese residents. Once resident in Portugal, you gain access to investment opportunities that might provide much better tax-efficiency alongside other advantages. And new residents can benefit from the significant tax advantages offered by Portugal’s Non-Habitual Resident (NHR) regime.
Locally compliant arrangements can combine your investment, tax and estate planning in one exercise, grouping different investments together under one tax-efficient roof.
This is the time you get to benefit from those years of pension contributions; instead of paying money in each month, you can start taking it out.
There is no one-size-fits-all solution for expatriates, but once you are no longer UK resident, it may become less beneficial to leave UK pensions where they are.
UK pension income is paid in sterling, so if your key spending is in euros, this invites exchange rate risk. UK pensions also remain subject to UK regulations.
Many expatriates choose to transfer UK pensions to a Qualifying Regulated Overseas Pension Scheme (QROPS) or reinvest funds into more tax-efficient arrangements for Portugal. As well as reducing taxation, this can offer benefits such as greater access to funds and more flexibility to choose how it is invested and in what currency to take income.
To protect your long-term financial security, research your pension options and fully understand the various implications. You need to take care here, so professional, regulated advice is essential.
None of us like to think about our departure from this world, but there is no denying that reaching retirement age does bring it closer to home.
The key message here is not to risk leaving it too late. Decide who you want to leave your assets to, how much and when. Then research the most effective way to achieve this, in the most tax-efficient way, taking both the Portuguese and UK rules into account. Succession law in Portugal is quite different from the UK’s, with restrictions on how you can divide up your estate. If the local rules don’t suit your wishes, you’ll need to plan ahead.
But don’t ignore your own needs in the process – look for arrangements that provide tax-efficiency for you today as well as your heirs in future.
An integrated financial planning approach produces better results than just focusing on one element at a time. For example, the way you hold your investments and pensions can affect how much tax you and your heirs pay and how the assets are passed to heirs.
While some try a DIY approach, cross-border tax, wealth management, pensions and estate planning are complex and it’s difficult to objectively assess your own situation. For peace of mind, talk to a specialist adviser who will take time to understand your circumstances, needs and goals to help you secure a prosperous retirement in Portugal.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
By Dan Henderson
Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com