Expat pensioner exodus: would the last person to leave Britain please switch off the lights?

Falling standards of living in Britain are encouraging rising numbers of pensioners to retire overseas – but experts warn expats to beware the dangers of disappointment.

Hopes of warmer weather and lower costs are two obvious motivations for leaving Britain when you no longer need to go to work every day – and recent legal changes have made it easier for expats to take their pensions with them.

More than 1m British passport holders are believed to have retired overseas and Standard Life reports that Spain remains the most popular destination – despite Foreign & Commonwealth Office (FCO) statistics which show it is also the country where Britons abroad are most likely to get into trouble.

For example, according to the FCO, while there are slightly fewer British residents in Spain than America, 50pc more Britons were arrested in Spain than America last year. More than five times as many Britons were hospitalised in Spain and a total of 1,786 died there, compared to 148 in America.

One explanation is that 13.3m Britons visited Spain on holiday, compared to 5.25m British holidaymakers in America. Elsewhere, Australia was the second most popular retirement destination, while France was pushed into fourth place by America, with Ireland coming fifth.

John Lawson, Head of Pensions Policy, Standard Life commented: “Retiring abroad is a dream for many people, but does require careful planning and advice. Many people think living abroad is cheaper than living in the UK, but this isn’t always the case.

“Doing your homework in advance of moving, matching your retirement income and expenditure, and making the appropriate decisions around purchasing an annuity or using income drawdown are key considerations. Your retirement income could also be subject to exchange rates and currency fluctuations, as well as local tax laws.

“You also need to think about your state pension and what, if any, reciprocal agreement is in place. A reciprocal agreement entitles you to any increases in the UK state pension, paid for by the country you retire to. However, if there isn’t a reciprocal agreement in place, then you need to be very careful your retirement income is sufficient to cover your living costs over a long period of time. Over a 20 year retirement, your basic state UK pension could halve in real terms if a reciprocal arrangement is not in place.”

Recent legal changes have made it easier to take your private sector pension overseas – and return to Britain later if you wish. However, David Franks of specialist wealth managers Blevins Franks said: “The expatriate needs to carefully consider whether they should move their UK regulated pension fund  into a Qualifying Recognised Overseas Pension Scheme (QROPS), which is an approved overseas pension fund.

“The benefits include being able to invest in your new country’s currency to remove exchange rate risks and costs, removing your fund from UK regulations, and you may even be moving into an improved tax regime.  You need to evaluate what UK guarantees you might be giving up, and the costs of any new structure.

“An interesting new development is proposed new UK tax residence rules. These give far greater certainty over exactly how many days you can spend in the Britain without becoming a tax resident.”

More pensioners look set to become expats in future. A survey of 7,500 people by benefits consultants Aon found that nearly six in 10 Britons wanted to retire overseas last year.

Less than half or 43 per cent of Britons said the United Kingdom was their preferred retirement location, making us the most unhappy Europeans about the quality of life in our home country. Among other Europeans questioned, only the Germans (46 per cent) and the Irish voiced nearly as low levels of satisfaction with their home countries at 46 per cent and 49 per cent respectively.

By contrast, Spain (87 per cent) and France (81 per cent) topped the popularity tables when it came to workers intending to retire in their home country, followed by the Danes (74 per cent).

Oliver Rowlands, head of retirement at Aon Consulting said: “Cheap air travel and the communication tools available over the internet means that retiring overseas doesn’t necessarily mean being completely absent from your family’s life, making the prospect of emigration to other countries on an previously unseen scale a real possibility.

“There are financial implications that people thinking about retiring overseas need to consider. Cost of living may be higher in the country of choice. There can also be tax implications and healthcare benefits can vary widely for expatriates and this will be a major concern for retirees as they grow older.”

Few expat pensioners can do much to increase their income if local taxes rise or sterling continues to fall against the currency of the country of their choice. So it is important to beware exchange risks and other potential setbacks before leaving Britain – and resist the temptation to hope financial worries end at Dover.