Avoid perils of retiring abroad

Spain is the most popular destination, as retiring Britons dream of a life of sunshine and sangria, followed by the US, Australia, France and Italy, according to an Aon Consulting survey.

Upping sticks and moving to a foreign country, however, isn't straightforward.

You have to cope with conflicting tax laws, living costs and pension and inheritance rules, and if the dream doesn't work out, climbing back on the British property ladder could prove a struggle.

"I'm amazed at how many people retire abroad without thinking it through, " says Bob Perkins, pensions specialist at independent financial adviser Origen. "Some discover the cost of living is higher than expected while others find their State pension is frozen or get hit by a surprise tax bill."

Here are the key things to consider.

YOUR PENSION IF YOU retire in the UK, your State pension automatically rises every year to keep pace with the cost of living. These increases, however, apply only in the EU and European Economic Area, which includes Gibraltar, Switzerland, Iceland, Liechtenstein and Norway and countries where the UK has signed a reciprocal social security agreement.

Some of the most popular retirement destinations for Britons, including Australia, Canada, New Zealand and South Africa, don't have any agreement with the UK, says Perkins. "Your State pension is frozen from the day you retire. If you move abroad at 65, your pension could be frozen for 20 years or more, by which time its value could have halved."

LIVING COSTS BRITONS once jetted off to southern Europe knowing the weather would be better and prices cheaper. Sadly, the latter is no longer true, so check whether you can afford the living costs.

If you're living off the monthly income from your UK pensions, as most British pensioners are, watch out for currency fluctuations. When the pound slumped 30 per cent against the euro during the credit crunch, tens of thousands of British pensioners found they could no longer afford to live in Spain.

CURRENCY TRANSFERS REDUCE foreign exchange risks by using a specialist currency service to transfer a monthly sum abroad at a fixed exchange rate for up to one or two years, says Duncan Higgins, senior currency analyst at Caxton FX. "This gives you the security of knowing how much local currency you'll get every month, which should help you plan your finances."

However, this can backfire. If you had arranged to send £1,000 a month to Spain when sterling bought just E1.10 in March, you'd be kicking yourself now that the pound is trading at more than E1.20, which means it's worth an extra £100 every month, or £82.

If you're sending lump sums, think twice before using a high-street bank, because it will typically hit you with a combination of high charges and poor exchange rates. "UK banks charge fees of up to £30 for foreign currency transfers and your overseas bank may also charge you a receiving fee, " says Higgins.

Currency services such as Caxton FX, HIFX and Moneycorp may offer better value. They waive all transfer charges, including from your receiving bank, and take a margin from the exchange rate.

Do your sums for the best option.

PROPERTY WITH UK property among the priciest in Europe, it's possible to sell up, buy a home overseas and still have cash to spare. However, legal and mortgage fees, removal costs and property taxes in your new destination will eat into any profits.

Take advice from a trusted legal expert in your new country, says Les Calvert, director of foreign homes website Mypropertyabroad.com. "Don't go it alone. Even if you've a basic grounding in the local language, you'll struggle to understand complicated legal documents and could fall foul of local property development rules and taxes."

If you sell up in the UK, it may be hard coming home again, says Mike Morrison, head of pensions development at Axa Wealth. "A lot of British pensioners don't expect to return home, but they do.

They get older, don't fit into the local community, find healthcare isn't as accessible, their partner becomes ill or they miss family. If house prices have risen, you'll maybe struggle to afford the same standard of property."

TAX TAX is a nightmare at the best of times but can be even worse when you have to deal with two tax systems, Morrison says. "Check whether your chosen destination has signed a double taxation treaty with the UK, otherwise you could end up paying tax twice on your retirement income and other assets."

You can search a list of countries that have signed a double taxation treaty with the UK on the HM Customs & Revenue's website at www.hmrc.gov.uk.

Some countries, including France, charge a wealth tax on all your assets, while foreign inheritance laws may also be very different from the UK.

You may need tax advice from a specialist who knows UK and local tax laws, and this can be expensive. "Start planning a few years ahead of your move to avoid being tripped up by unexpected problems, " says Morrison.

HEALTHCARE IF YOU are retiring in the EU or EEA you should be able to get free state healthcare in your new destination, but it may not be as comprehensive as the NHS, says Jan Lawson, managing director of medical insurance brokers the Private Health Partnership. "You'll need to register with the health system in your new country and you should assemble all the necessary documentation before you go."

If you are moving outside the EU, especially to the US or Australia, you'll need private medical insurance. So consider whether you can you afford premiums.