Sun, sea . . . and better value for money: Top places to retire
Portugal, France or Spain? Pension tax implications or other high-living costs can lead people to look abroad
Retire to the Algarve in Portugal . . . and pay 0% tax on your pension. Photograph: Hemera
Retire to Malaga . . . and pay just €4.50 for a bottle of wine. Photograph: Marco Cristofori
Retire to Arcachon . . . and avail of the French health system.
How are you going to afford to live in retirement? Not sure? Well, one possible option for under-funded – or even generously funded – retirees is to seek out a lower cost of living by moving abroad.
While retiring abroad has never been as popular with the Irish as it has been with our neighbours across the Irish Sea, it may well grow in popularity. More sunshine, better healthcare, cheap wine, a slower pace of life; the reasons to move abroad are plentiful.
But there could also be tax incentives in opting to live out your later years somewhere else, which could make your depleted pension pot last that little bit longer. It’s something many of us aren’t aware of: you can avoid tax when saving for your pension but, when you retire, the income you draw down – apart from your tax free lump sum – is taxable.
However, like everything, maximising a move to another country will take careful preparation. And it may also raise a moral question; if we’ve built up a pension fund tax free in Ireland should we not spend it and pay taxes here?
Prepare for it
Murphy and his wife bought a place in Portugal on a golf course to which they planned to retire, but the environment of the development changed.
“All of a sudden we found that, in a period of 18 months, the whole landscape had changed,” he says. So now they’re thinking of Spain, perhaps near Seville or Castellon, or on the Costa del Sol – and getting ready for the move.
“You’ve got to do your research. It’s not something you decide to do in a day. You have to give it some thought, not just do it because it seems a trendy thing to do,” he says, adding, “I wouldn’t do it without getting proper financial advice”.
A major concern for people as they get older is healthcare.
“People would often express concern: ‘I’d better watch the health system’ but it would be the least of my worries,” says Murphy. Indeed Irish people should be able to access local public health systems in the European Union – many of which will be a lot more efficient than our own over-stretched one.
You also have to think through what happens if you go as a couple and one gets sick or dies. Will the other person stay or come home?
This also means making a decision on the family home. Murphy is considering selling the family home in Dublin when it’s time to move, although this will depend on whether or not his children will need it as a base.
And if you do want to keep a base, it doesn’t always mean the family home. Murphy knows of a couple who sold their house in south Dublin and bought a mobile home in a seaside resort in north Dublin, close to the airport, for €30,000-€40,000.
Another concern for many people is accessing their pension from abroad especially the State pension. According to the Department of Social Protection, your state pension can be paid into a bank account anywhere in the world.
And while you might think that €235 a week is veering towards the miserly end of things, it’s more than enough to cover two months of utilities in a country such as Portugal, for example.
According to the Department, you must notify it of your new address and payment arrangements before you leave Ireland, and should your circumstances change while abroad – such as the death of a qualified adult/spouse – you must inform them also.
Another requirement is that you complete and return an annual certificate of continuing eligibility.
However, there are some restrictions. If you are only entitled to a non-contributory means tested pension, you won’t be entitled to bring this with you abroad, although it may be possible “in exceptional circumstances for a limited period, subject to the discretion of the Department”.
When it comes to a private pension, your payments can also be transferred to a foreign bank account; however, it may not always be tax advantageous to do so.
When considering what taxes you will pay, remember that this will depend on your place of residency – irrespective of where you have accumulated your pension.
“It’s the principle that underpins this whole area,” says Munro O’Dwyer, partner with PwC. If you have an interest in a property abroad, and live there for the vast majority of the year, then you are likely to be resident in that country.
This means that you will then be liable to pay tax in that country, and some offer particularly advantageous terms for retirees.
Portugal, for instance, offers the prospect of a tax-free retirement, sunshine, endless beaches, a good network of flights to airports across Ireland – oh and did we mention taxes?
In 2009, the government in Lisbon introduced an exemption, the non-habitual residents regime, which allows you to pay no tax on foreign sources of income for the first 10 years. Introduced after the financial crash and subsequent euro zone crisis, the aim of the regime is to encourage foreign residents to relocate bringing their wealth with them.
Residents of countries which have double tax agreements with Portugal are eligible to apply for the regime, but they must move to the country and have an interest in a property, either via renting or buying.
This means that you can effectively live tax-free off the proceeds of your pension, saving yourself a considerable amount in the process. After 10 years you will be taxed at Portugal’s marginal rates.
And you can live cheaply in Portugal. As our table shows, the cost of living is 36 per cent cheaper in Portugal than it is in Ireland. You’ll pay about €465 a month for a one-bed apartment in a city centre, or €553 for a three-bed outside a city centre. However, as detailed below, restrictions do apply.
There are, of course, other options. International Living magazine rates Mexico as the best country for retirees, based on factors such as cost of living, weather, lifestyle and infrastructure. It’s followed by Panama, Ecuador, Costa Rica and Colombia. But these locations are unlikely to appeal to Irish retirees, who typically favour Spain, France or Portgual or, a bit further afield, Florida.
A cheaper cost of living is a major attraction. Murphy cites an Irish couple he knows living on their state pension – “a king’s ransom” – in a smaller town outside Malaga in Spain. They sold their home in north Dublin for €180,000, bought an apartment in the town for just €60,000 and have a nest-egg of €100,000.
A little further afield is Cyprus, which also offers a tax advantageous proposition for Irish expats, as foreign pension income is taxed at a rate of just 5 per cent on amounts over €3,420. This means that a pensioner would pay about €440 in tax on a pension of €3,000 a month in Ireland, €0 in Portugal, and €150 in Cyprus.
Be prepared for income restrictions in some countries; in Ireland for example, retirees from outside the European Economic Area – essentially the EU plus Iceland, Liechtenstein and Norway – looking to live here must have net annual income of €50,000 per applicant, while Irish retirees looking to move to Thailand, for example, must have a monthly income or pension of 65,000 Thai baht (€1,737).
What about Irish rules?
Of course there are two sides to every coin; while certain countries are looking to encourage people to spend their Irish pension pots in those countries by offering tax advantages, the Revenue in Ireland has its own rules as to what’s allowed.
If you’re in a traditional defined benefit (DB) scheme, and your retirement income is in the form of an annuity, the tax treatment is much clearer.
You will be able to request a PAYE exclusion order from Revenue, which means that the recipient would only be liable for income tax in the country in which they reside.
If, however, you’re in a DC scheme, or have your money in an approved retirement fund (ARF) – which will increasingly apply to most of private sector workers – some restrictions will apply.
Johnny Mulholland, managing director of International Pension Transfer Consultants Limited, notes that an ARF retirement account does not provide a pension for life and, as a result, “the income is not treated as pension income”. This will clearly impact people with DC schemes looking to avail of the no-tax deal in Portugal.
It’s a bit of a grey area when it comes to tax laws.
“Of course it [an ARF] is a pension; but tax legislation hasn’t quite caught up with new drawdown regime,” says O’Dwyer.
This means that the Revenue won’t issue exclusion orders for ARFs, so if you move abroad, PAYE will be withheld from your deductions. While you will be entitled to this back under double taxation treaty agreements, you will have to go to the bother of claiming it back.
“The legislation is slightly misaligned with what people are seeking to do,” says O’Dwyer, adding that while this is “understandable, because there is potential for some abuse”, it’s nonetheless taking a little while for everything to catch up.
Of course you could just purchase an annuity with your ARF, but given interest rates, this is very unattractive for the moment.
Transfer your pension – but not yourself
One way around this is to transfer your pension to a Maltese-based personal pension.
According to Mulholland, doing so would allow someone over the age of 50 an immediate Pension Commencement Lump Sum (PCLS) of 30 per cent and an income of circa 6.5 per cent from the residual amount commencing immediately or in any year between 50 and age 70.
A double taxation agreement exists between Malta and Portugal, which thereby creates a tax-free pension income for an Irish national who has taken up residency in Portugal.
Already retired overseas? Irish Times Abroad wants to hear about your experiences. Send your stories (max 400 words) with a photograph to firstname.lastname@example.org. A selection will be published online.