‘We’re retiring to Spain: what are the tax rules?’

Those who rush abroad may forfeit their 25pc tax-free pension cash unless they plan ahead. By Jessica Beard

Retiring abroad is the dream for many sun-seeking older workers but if rushed it can lead to surprise tax bills and pension headaches. Ken Shelverton*, 52, moved to the Costa Blanca in Spain with his wife Pam, 56, last year to live out their dream of a warmer climate. Mr Shelverton took early retirement aged 49 after several health scares forced him to re-evaluate his priorities in life.

“I gained a sense of my own mortality and I realised I had saved enough to afford a good quality of life. My view is that if it is fit for purpose then stop saving. Why carry on working if you are satisfied that you have enough?” he said.

He cannot access his self-invested personal pension until he reaches 55, but he has been actively managing his pot in anticipation. Nearly £550,000 has been invested in Vanguard LifeStrategy funds, while a further £ 26,000 has been put into individual stocks, including the insurer Legal & General and the defence firms BAE Systems and Ultra Electronics. But Mr Shelverton wants to know if this mix of investments is suitable for him in view of recent stock market wobbles and the need to match rising inflation.

In the meantime, the couple are using Mrs Shelverton’s pension to draw an income of £ 700 a month, from a pot worth £70,000. They also have cash savings worth £44,600 in Britain and €13,100 (£10,900) in Spain.

So far, this has covered their €27,000 annual living expenses but Mr Shelverton wants to know if it will be enough to last them until his 55th birthday. He said: “Luckily, we do not need to increase our annual spending in line with inflation as we have some fat in the budget.”

The couple will eventually ually receive the state pension, though ough Mr Shelverton is four years short in his National Insurance record cord to receive the full amount. Should hould he “buy” those extra years? ears? And what does living in Spain pain mean for the taxes on all ll their pensions?

Jason Porter

Financial adviser for expats at Blevins Franks As Spanish tax residents, Mr and Mrs Shelverton would be taxable in

Spain has taxes that do not exist in Britain. Below, Ken and Pam Shelverton

Spain on their worldwide income and gains. Mr Shelverton could top up his UK state pension with Class 3 National Insurance contributions for around £800 for each of the four missed years – £3,200 in total. This would increase his state pension by an estimated £900 a year and he would be in positive territory within three-and-a-half years.

He said he planned to take his 25pc lump sum in June 2024, when he reaches 55. Unlike in Britain, where this amount would be exempt from taxation, Spain would tax it. Assuming an exchange rate of £1 to €1.10, he would have a Spanish tax liability of roughly €64,000 (£58,200).

This could be avoided if he were a UK tax resident for the year in question, spending more than six months in Britain and less than 183 days in Spain. This would require some careful planning as the British and Spanish tax years do not coincide.

They have confirmed their annual spending will be €27,000.

They have about € 62,000 across UK and Spanish bank accounts, and accounting for the £8,400 a year they will be taking from Mrs Shelverton’s Sipp they will exhaust this cash during their fourth year – a year after Mr Shelverton gets access to his Sipp.

In addition, without making any assumptions for growth of their pension funds, the joint € 720,500 they have would cover their living costs for more than 26 years.

They have said there is some “fat in the budget”, but they need to reserve some money for unexpected spending, such as medical expenses. Nor has any account been taken for inflation, which is currently rising, or the fact that we are all living longer.

The risk of running out of funds in later life is som something they should definitely think about and make provision against against.

They wi will also need to be aware of Spanish wealth taxes and succession r rules. Spain, like other countri countries in Europe, has taxes that d do not exist in Britain, includ including a wealth tax.

An Any assets around the wor world must be declared for the wealth tax if they exc exceed € 2m. Mr and Mrs She Shelverton must do so if thei their wealth does exceed this amount. Overseas assets exceeding €50,000 must also be declared and failure to do so could lead to severe penalties.

Dennis Hall An adviser at Yellowtail Financial Planning

The good news is that for their state pension the post- Brexit agreement with the EU means that they can receive their payments from Spain and they will rise in line with those in Britain.

In the meantime they need to bridge the gap between now and the state pension age, which looks achievable based on their combined Sipps. However, the personal pensions will be covering the gap before the state pensions start and the shortfall thereafter, and they’ll be relying on them for 35 years or more. They cannot afford many mistakes.

I’m a fan of Vanguard’s low- cost tracker funds, although given the need to draw income in the near future I question the use of the LifeStrategy funds. In these funds there’s a blend of global stocks and global bonds, which provides diversification. However, there’s no way to separate the bonds from the stocks, and should there be a crash in stock markets you cannot choose to sell just the bonds to meet income needs while you wait for the stocks to recover.

My preferred option is to hold a global fund that invests in stocks for long-term growth, a global bond fund for diversification and medium-term income needs if markets fall, and cash to cover at least a year of income. With the current funds, if the stock market falls and you start to draw income, you’ll be selling shares at a loss.

I don’t see any rationale for holding the individual stocks. The amounts are too small to make a significant impact on the portfolio and the results appear to be a bit hit and miss. Overall, the portfolio appears to be around 60pc stocks and 40pc bonds and cash.

That could probably sustain the income levels they’re looking for, but could become strained if they’re hit with significant costs, the loss of a state pension or significant inflationary pressures in the coming years.