Whether you are nearing retirement or it is several years away, it is never too early to start thinking about how you will finance your golden years. Even if you are already retired, you should regularly review your arrangements to ensure you continue meeting your retirement goals.
What do you need to think about to secure your dream lifestyle in retirement?
Even if retirement is a way off, there are certain things you need to consider to make sure you are on the right track financially. There may be steps you can take today to help make your retirement goal a reality.
• Will I be able to afford to retire when I want to?
• What is the best strategy for withdrawing from my business or employment?
• What options do I have for my pensions? Are they likely to change?
• Will I be able to retain my existing wealth and assets?
• Do I want to spend some or all of my retirement abroad?
Let’s say that you plan to retire within the next few years and move permanently to Portugal. You may have concerns about whether you can afford your preferred lifestyle without having to sell existing assets. Perhaps you have a business to sell and are unsure how best to convert your years of hard work into a retirement nest egg. Then there are the complex residence and tax implications of living in a different country.
Here, professional financial advice can prove invaluable, especially with an adviser who understands Portugal. They can take a holistic view of ‘what you have’ – your savings, investments, assets, pensions – together with ‘what you want’ – your timeline, income requirements, legacy wishes – and an objective assessment of ‘who you are’ – your circumstances, goals, risk appetite – to design a personalised retirement plan for you.
Being retired doesn’t mean you can forget about retirement planning.
Regular reviews allow you to adapt your strategy to suit your changing circumstances and goals, such as incorporating new family members, addressing health issues or relocating. It enables you to keep up with the ever-changing tax and pensions landscape, including new opportunities that could work in your favour.
Your pension options
Pensions are usually the foundations of retirement, so deciding what to do here may be one of life’s most important financial decisions. Pensions are complex, and with greater freedom and choice than ever, you must take great care.
You might benefit from consolidating several UK pensions into one to provide a coherent, more cost-effective investment platform for your retirement income, but first establish what would be the most tax-efficient approach for a Portugal resident. Receiving pension income in sterling also exposes you to conversion costs and exchange rate risk.
British expatriates have the option of transferring UK pensions to a Qualifying Overseas Pension Scheme. QROPS can unlock advantages you do not always get with UK pensions, such as flexibility to take income in euros and more freedom to pass benefits to chosen heirs. Transferred funds would be protected from further UK lifetime allowance charges.
Transfers of an EU-based QROPS by an EU resident are currently tax-free but transfers outside the EU/EEA invite a 25% UK tax penalty. So far this has not been extended to EU transfers post-Brexit.
Transferring is not a one-size-fits-all solution and the benefits of QROPS vary between providers and jurisdictions. Take regulated, specialist advice before making pension decisions to protect your benefits and establish the best option for you.
Keep an eye on the UK’s lifetime allowance (LTA). The UK caps how much you can hold in combined pension benefits (excluding State Pension) without paying extra tax. Once your funds exceed the limit, you pay a tax charge whenever you access your money – 55% for lump sums or 25% for income or transfers to an overseas pension. This also applies to non-UK residents.
Your pension will be assessed for the LTA when you transfer into a QROPS, but after that your funds are protected. If investment growth could take you above the limit, transferring sooner rather than later could save you tax.
The March 2021 Budget cancelled this year’s scheduled LTA increase, freezing the limit at £1,073,100 until 2026. And press speculation suggests that the UK Chancellor is considering cutting it to £800,000 or £900,000.
If you plan to retire in Portugal, review your retirement strategy early. You need to consider your residence status and cross-border tax implications in a post-Brexit world, and adapt your estate planning to suit Portugal’s different succession rules.
Careful planning is the key to minimising taxation and maximising the available opportunities so you can enjoy the retirement you want for as long as you need. For the best results, take specialist, cross-border advice.
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