As life expectancy increases, so does the length of time needed to stretch income in retirement. Taking the right steps now can help you enjoy your dream lifestyle in Portugal for as long as you want.
Most people today live into their 70s and beyond. UK statistics show the average life expectancy of men aged 65 in 2017 to be 83 and women, 86 – that’s 5 and 3.5 years longer than in 1989. Meanwhile, Britons aged 90 could expect to live another 4 years.
While this is good news, increased life expectancy comes with some downsides. Simply put, can we afford the cost of living longer?
You can assess whether your resources are on track to last your lifetime by considering these five key questions.
How much retirement income will you need?
Do you want just enough to live comfortably, with perhaps a bit extra to afford some luxuries now and then? Would a modest income suffice so long as you have access to ‘rainy day’ or contingency funds?
If you are still working, will your pensions, savings and investments cover your lifestyle needs, or are you planning to cut back when you retire?
Remember to factor in the effect of inflation on reducing your spending power each year. Say, for example, you spend €5,000 a month. Assuming inflation of 3% a year, in 10 years’ time you could need about €6,720 a month to maintain the same spending, and €9,030 in 20 years.
How much do you want to leave behind?
If you intend to leave a lasting legacy for your family or other heirs, you have to make sure you do not spend it in your own lifetime – without compromising on your own quality of life today. A holistic financial planning approach – that considers estate planning alongside your wealth management and tax planning – can prove invaluable here.
How can you get the most from your pensions?
For most people, pensions are the key to financing retirement, so you need to take extreme care to do what’s right for you. The State Pension – currently worth a maximum of £8,762 a year – is unlikely to fulfil your requirements alone.
While you should review your options, your best approach could be taking no action at all, especially if you have a ‘final salary’ pension that guarantees an income for life. In any case, beware of opportunities to ‘liberate’ your pensions before age 55, as these are likely to be scams.
Retired expatriates can benefit from transferring UK pensions to an EU/EEA-based Qualifying Recognised Overseas Pension Scheme (QROPS) or reinvesting a lump sum into Portuguese-compliant arrangements. As well as tax efficiency, this can provide estate planning advantages and flexibility to take income in sterling or euros. However, there are many variations in products and jurisdictions that can affect the benefits.
Take personalised, UK-regulated advice to explore suitable opportunities and establish the most beneficial approach for your circumstances and goals.
How can you make your savings and investments last?
You should review whether your savings, investments and assets are working as hard as they can for you and are protected from unnecessary taxation. For example, are you making the most of tax-efficient opportunities available to Portugal residents, or are you holding onto UK assets that attract higher taxation and maybe even provide less growth? If you are a business owner, have you planned a tax-efficient exit strategy to get the best out of your years of hard work?
There are also currency considerations. Taking income in sterling while spending euros in your daily life exposes your money to conversion fees and exchange rate risk. Explore arrangements that offer the flexibility to hold investments in more than one currency and convert when it suits you, such as a Portugal-compliant life assurance bond.
Do not underestimate inflation here too. While it is tempting to choose low-risk investments in your later years, your capital still needs to keep pace with the cost of living, and bank deposits are unlikely to do this. Your financial adviser can recommend a diversified investment strategy to meet your situation, goals and risk tolerance.
How can you limit the effect of taxation?
One unwelcome side-effect of rising life expectancy is a general trend for tax rises, as governments face escalating pension and healthcare services for ageing populations.
Higher taxation can be a serious threat to your financial security in retirement. Look for arrangements available to expatriates in Portugal that can significantly minimise taxation, making your money go further, for you and potentially your heirs. For the best results, take personalised, cross-border advice.
Whatever your stage of life, good financial planning can help you afford the lifestyle you want for as long as you need, so you can focus on enjoying your time in the Algarve.
This article should not be construed as providing any personalised investment advice. You should take advice for your circumstances.
By Mark Quinn
Mark Quinn, Partner of Blevins Franks.