Lowtax Quarterly Expatriate Briefing
By the Lowtax Team
23 September, 2011
For many people, starting a new life abroad is a dream, but for some expats the dream has the potential to turn into a nightmare if the financial implications of the move have been ill-considered, and recent surveys have highlighted how crucial the issue of sound financial planning is for expats as the economic climate takes a further turn for the worse.
Several economic trends have conspired to make life very difficult for certain nationalities of expats in some countries over the past few months, with exchange rate volatility being high up on the list. The US dollar and sterling remain weak, while the value of the euro, the Australian dollar and the New Zealand dollar has risen relative to the main currencies. Meanwhile, a recent surge in the Swiss franc has resulted in that countrys central bank taking the unusual step of announcing a minimum exchange rate for the currency against the euro. These trends have severely squeezed the incomes of those expats originating from countries with weak currencies; a British pensioner, for example,who retired to France or another eurozone country four years ago could have found his or her retirement income fall by about a quarter.
Another factor is the continued uncertainty surrounding the state of the real estate market. While there are regional and local variations in the international property marketKnight Franks most recent global property report, released this month, suggested that global house prices grew at their lowest rate since 2009 in the second quarter, with prices set to trend sideways at best for the foreseeable future. Indeed, many expats who have borrowed to finance property purchases have already been burned badly by the reversal of markets in hotspots like Spain, where property prices rose by 145% from 1997 to 2005, before experiencing just as steep a descent after the bubble burst in 2008.
The rising cost of living in some countries is also eating into expat income, especially for those who have retired abroad with a relatively meagre pension income, or who depend on a state pension from their country of origin. Britons, for instance, will see their state pensions effectively frozen from the moment they retire unless there is a reciprocal agreement in place between the UK and the host country, and as inflation eats away at the value of this money, pension income will be considerably reduced over time.
A survey released by the currency dealer Money Corp earlier this month showed that over 50% of British expats have experienced a sharp fall in their incomes since they moved abroad, despite the fact that most of them moved away to seek a more comfortable existence.
Therefore, it pays to do your swatting up well before you make the move to sunnier climes. As John Lawson, Head of Pensions Policy at Standard Life observed upon the release of a survey last month, which showed that Spain remains the number one retirement hotspot for those migrating from the UK: "Retiring abroad is a dream for many people, but does require careful planning and advice.
And his advice is just as applicable to citizens of other nations who are thinking of retiring abroad.
Many people think living abroad is cheaper, but this isn't always the case, he said. 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.
In spite of all the pitfalls and the economic doom and gloom however, research by HSBC suggests that expat finances in a more general sense are actually in an extremely positive state, with the majority of those polled by the banks Expat Explorer survey revealing that they have been able to save more since moving abroad. Two-thirds (66%) of expats reported having more disposable income in their new country, especially those who have migrated to wealth hotspots like Bahrain, Bermuda, Qatar and Saudi Arabia.
Although saving levels amongst expats as a whole have dropped since 2009, 61% of expats are still saving more whilst working abroad and one in five (20%) are able to pay off more debt than when they lived in their country of origin, the survey shows. Only 5% of expats surveyed are now accumulating more debt.
All in all, in the current economic climate, the financial risks associated with expatriation are certainly not getting any smaller. And all this before one even considers the practicalities of living abroad, such as learning the language, getting used to local culture, dealing with a foreign bureaucracy, educating the kids, and being away from close family and friends for long periods of time. Then of course there is the tax man to deal with not only in your country of residence, but also in your country of birth, and, for citizens of some countries, such as the UK and the US, he is quite hard to escape! So getting clued up on the relevant tax laws in your destination country is also crucial, whether you intend to work, run a business, or retire abroad. Usually, seeking sound independent advice is the best way to deal with the tax aspects of expatriating.
Although moving abroad remains something of a minefield for most, with governments in Europe and the United States turning the fiscal screws ever tighter on their citizens, and with very low prospects for economic growth to return any time soon, there is going to be no shortage of people from these countries seeking opportunities and rewards elsewhere, or looking for a lower-taxed, higher quality life in the years ahead.
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