For a less taxing retirement, head abroad

published 28 August 2009

If you want to retire in the sunshine and get the most from your retirement money, what are the best options? Laura Henderson reports.

The dream of retiring abroad turned sour for many expatriates in 2008 as the plunging pound hit their standard of living. Eurozone migrs in particular, relying on fixed sterling incomes from savings or UK pensions, saw their purchasing power fall by around a third last year. Yet despite shrinking war chests, one in six Britons over the age of 55 will have left Blighty by next year, reckons the Institute for Public Policy Research it's just that their preferred destinations may have changed.

Long-haul stalwarts, such as Australia, New Zealand and Canada, have been joined by 'tax haven' newcomers Malaysia, Belize and Panama. A growing number of short-haul escapees are avoiding old favourites, such as France, Spain and Portugal, in favour of the less costly delights of Morocco, Turkey and Cyprus. "The latter all boast light-touch tax regimes compared to Spain and France, which continue to put the financial squeeze on foreign homeowners," says Peter McGahan of independent financial adviser Worldwide Financial Planning. So if you're looking for sunshine, a reasonable cost of living, and a forgiving tax regime, where should you go? We've looked at three countries for potential expatriots to investigate.

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John Darwin, the man who faked his own death to start a new life in Panama, may not have been the world's most successful fugitive. But he certainly had the right idea when it comes to relocating. A nation transformed since the US ousted military dictator Manuel Noriega in 1989, Panama, like emerging Caribbean basin markets such as Guatemala and Belize, has capitalised on a steady drip-feed of money from a high-spending, empty-nest class of US and European retirees looking for a casita (small house) under the palms.

As the early pensionados (pensioners) set themselves up with second careers, running start-up businesses such as bed and breakfast establishments and restaurants, they in turn are attracting more of their compatriots to the country. Yet despite the country's growing popularity, it still offers an inexpensive lifestyle combined with excellent tax breaks. Indeed, International Living magazine ranks it as one of its top three overseas retirement havens for US expatriots (for the full list, see www.retirement-index.com).

Overseas residents number around 80,000. The majority settle along the Pacific coast near the capital Panama City in beach destinations such as Coronado, Punta Chame, Gorgona and Rio Mar, where property prices remain competitive. New-build apartments with sea views sell for as little as £50,000, while top-end designer villas go for upwards of £350,000. International Living's Jessica Ramesch points out that it's also possible to buy Panamanian-style homes for far less in inland towns such as David, although obviously what you gain in price you sacrifice in terms of nightlife and easy access to the beach.

Retirees have plenty to smile about in Panama. There's no tax on offshore-derived income, be it a pension, bank deposits, overseas property rental or an investment portfolio. Nor is there any capital gains tax (CGT) or inheritance tax. Moreover, foreign owners of new-build properties that have construction permits issued before 31 December 2009 are exempt from paying property taxes on a sliding scale of five to 15 years, based on the market value of the property.

So how do you get in? "The most straightforward means of securing residency is with the pensionado visa," explains John Hitchcox, chief executive of international investment firm YOO, "with low entry-level requirements for individuals that receive a pension for life in their native county." Applicants must demonstrate a minimum income of $1,000 a month (this is cut to $750 a month if you invest $100,000 or more in real estate) and $250 for each dependant. Once the visa application is approved, the pensionado benefits are there for the taking. Better still, a new law states that from 29 August 2009 all applications must be approved or denied within 60 working days of submission if not, the applicant is automatically granted the permit. Pensionado perks are numerous with up to 50% off key services from doctors' fees and hospital costs to public transport and airfares.

Income tax on a sliding scale of 20.5% to 27% is payable on Panamanian earnings, with the first $9,500 exempt. However, you can claim some exemption from tax on rental income if you let a property. And if you invest in one of Panama's 'tourism zones' you may be exempt from income tax altogether on any income it provides for 15 years. Retirees also receive a one-time exemption on the importation of household goods up to the value of $10,000 and enjoy an exemption from duties on the importation or local purchase of a car every two years.

The government's 'Malaysia My Second Home'(MM2H) initiative, launched in 2002, is worth exploring. To qualify, buyers over the age of 50 must hold at least RM (Malaysian ringgit) 150,000 (about £26,000) in a deposit account, but can use this money to buy a property and keep a minimum balance of RM103,000 (£18,000) for subsequent years. As long as they don't work in the country, successful applicants benefit from a rolling ten-year residency visa and can bring their spouses, unmarried children under the age of 21 and parents above the age of 60 into the country as dependants.

MM2H residents may bring in household effects duty-free, and import or buy one vehicle locally, tax-free. They are exempt from Malaysian income tax on pension and related income remitted into the country. A 'tax-lite' regime also means no CGT, wealth tax or inheritance taxes. Income tax for foreign residents on earnings made in Malaysia is levied at a flat 28%, although mortgage interest payments and property maintenance costs can be offset against this. As for where to stay, many settlers put down roots on the scenic Sepang Gold Coast, close to the capital Kuala Lumpur and the nearby yachting hub of Port Dickson, or on the tropical island retreats of Penang and Langkawi, where freehold apartments can be had for as little as £80,000.

If trekking to the other side of the world is a step too far, you might find Cyprus more to your taste. The Mediterranean's third-largest island has struck a chord with British retirees more than 60,000 own homes on the island and foreigners account for 20% of all property transactions. It's small wonder. The short flight-time from the UK and a thriving expatriot community mean homesickness and culture shock aren't as significant a problem as with more far-flung destinations. Paphos on the west coast remains a prime retirement spot, with three-bedroom villas in sought-after locations, such as Coral Bay, fetching upwards of £300,000, while apartments in the bustling town of Larnaca to the east can be had for £100,000 although, like everywhere else, developers are suffering in the downturn, so negotiate.

Cyprus joined the European Union in 2004, and adopted the euro in 2008. The country boasts favourable tax treatment of anyone in receipt of pension income, regardless of age. "If you live in the country permanently or at least six months a year, you can benefit from becoming a tax resident, whereby any pension state, business or personal is taxed at a flat rate of just 5%," says George Karavis, tax partner at Grant Thornton in Cyprus. "Interest and dividends are exempt from tax, but are subject to the 'special defence contribution' of just 10% and 15% respectively." Be aware that retirees cannot work in Cyprus once their application is approved.

Other financial incentives include index-linked increases to UK state pensions, and British retirees also can also claim their winter fuel allowance. Foreigners are, however, subject to income tax on any income earned in Cyprus, including property lets, which is taxed at a progressive rate up to 30%, depending on the rental period. CGT is also payable at a rate of 20% on the profit of the sale of a property, although the first €17,086 (around £14,000) of the gain is exempt.

The NHS may not be perfect but it is universal and low cost (eg, a prescription), or free (eg, a doctor's visit) at the point of use. That may not be the case overseas. Within the European Economic Area (EEA) you'll get free healthcare once you are receiving your state pension, but even then some countries charge for some or all of the cost of treatment. Outside the EEA you will probably need insurance. This can get pricey comprehensive private cover can cost more than £3,000 a year for a couple living in Europe, or more like £10,000 in America or Canada, notes Planyourretirement.co.uk.

British weather is a source of constant grumbling, but at least it's fairly benign. Overseas, things can be very different places that were a delight when you visited in spring may be a sweaty nightmare in high summer, or bone-chilling in winter. Vaccinations will also need to be up to date check with your doctor for the latest advice. And ask the locals about bugs. For example, newcomers to Sydney are often surprised at how often locals have to scrape highly toxic bat poo off their cars and even their clothes.