Sick of sky-high taxes and dreaming of retirement overseas? The professional information to the international locations determined to draw Britons with low-cost value of dwelling and taxes as little as SEVEN per cent – and the pitfalls to keep away from

The ultra-wealthy are fed up of Britain’s high taxes and have started leaving the country – and who can blame them.

But it doesn’t just affect them. Frozen tax thresholds, a looming tax bill on the state pension and higher charges on savings and dividends make for a nasty cocktail that punishes hard workers and diligent savers.

This onslaught of stealth taxes announced in last month’s Budget delivered little comfort, especially for Britain’s pensioners. So if you too have had enough of our economic shambles, and are nearing the end of your working life, one solution could be to follow in those well-heeled footsteps and retire abroad.

But before you pack your bags, you need to understand how your retirement income will be paid once you live abroad. A move can leave you far better off – but only if you choose the right country and get your paperwork in order.

Mike Ambery, retirement savings director at pension group Standard Life, says: ‘The thought of retiring abroad can be tempting – particularly in the middle of a cold British winter – but there are a number of financial implications to consider.

‘Moving overseas can affect how your pensions and other assets are treated, both in the UK and in your new country of residence.’

What to watch out for

Crucially, moving abroad won’t automatically mean that you pay less tax.

Become a resident of another country and you’ll be subject to its tax rules, but you could also end up paying taxes in the UK too.

Rosie Hooper, chartered financial planner at Quilter Cheviot, warns: ‘Your tax responsibilities do not automatically stop when you leave the UK, and you could be taxed twice on the same income if you have not checked the rules in your new country.’

You need to find a country that has a double tax treaty with the UK. That means as long as the British Government doesn’t still consider you a resident here, you’ll pay tax only in your new home country.

But these treaties don’t apply automatically. HMRC must issue your pension provider an NT (no tax) code. Until then your pension may still be taxed in the UK at 20, 40 or even 45 per cent. In most cases you will need to fill in a form called ‘Form DT-Individual’, which you send to your local tax authority for certification before they forward it to HRMC.

‘Make sure you understand where you will be considered tax resident, how your pension income will be treated and whether you need to file tax returns locally,’ adds Hooper.

You must do this to make sure the UK and your new country do not tax your pension twice.

Also, before you move, check how the country you are going to will tax your income. Local rules may be worse than in the UK and mean you end up paying more.

For example, Claire Trott, head of advice at wealth manager St James’s Place, warns that the 25 per cent tax-free lump sum you could have taken from your pension in the UK may well be taxed when you move abroad. Income taken from an Isa may also cease to be tax-free.

In many popular expat countries, including Italy and Spain, interest, dividends and gains from Isas are taxed in full.

Your state pension will still be paid to you overseas, but it will only continue to increase each year if you move to a country with a reciprocal uprating agreement. EU and EEA countries qualify, but some favourite destinations such as Canada and Australia don’t, so there your state pension income will be frozen at the rate you first receive it.

‘What’s crucial is to work out where you want to live, find where you can afford to live and then focus on the tax consequences of a move,’ says Marc Acheson, who is a global wealth specialist at Utmost Wealth Solutions.

Once you’ve dealt with the basics, the decision on where to live comes down to where offers the lifestyle, cost of living and tax treatment that best suits you. These are the destinations topping advisers’ lists.

Greece

This is fast becoming one of the most attractive overseas options for Brits who want to retire in the sunshine with a low tax burden.

Greece has introduced a 7 per cent flat tax on most foreign income – including UK pensions – for qualifying retirees who move there. The rate applies for 15 years, offering long-term certainty that is hard to find elsewhere.

To qualify, you need to relocate from a country that has a double tax treaty with Greece – which the UK has – show you have a stable income and become a tax resident.

Just choose where you end up carefully as some of the islands can be pricey. Healthcare is improving, with a public option available, but many expat pensioners take out private insurance too.

Italy

An increasingly popular choice with pensioners, Italy also offers a flat 7 per cent tax on foreign pension income in some of its southern regions.

If you move to certain eligible towns and villages in regions such as Sicily, Sardinia and Puglia you can pay that low tax rate on most foreign income, including your UK pension, for ten years. But elsewhere, income tax ranges from 23 per cent to 43 per cent depending on the region and income level.

Investment income, including interest and dividends that would be tax-free inside an Isa, is taxed at 26 per cent. Pension lump sums that are tax-free in the UK are also taxable in Italy, so if you want to retire here, consider taking your tax-free lump sum before making the move.

The combination of warm weather, excellent food and relatively low property costs makes southern Italy especially appealing. Smaller towns offer affordable homes and living costs remain manageable outside the big cities.

Healthcare is largely subsidised. Once you are a resident you can join the national health service, while adding private top-ups, for things such as dental care, are generally inexpensive.

Malta

The Mediterranean island has become a popular choice thanks to its climate, good quality healthcare and tax system. It is also English-speaking. But it is Malta’s tax system that makes it really attractive.

Under the Malta Retirement Programme, foreign pension income is taxed at a flat 15 per cent, provided it is your main source of income and you meet the residency criteria. Everyday expenses such as groceries, dining out and utilities tend to be cheaper than in the UK. Property is also significantly cheaper than in the UK.

Spain

Spain remains one of the most popular choices. Healthcare is a major attraction. Once you are a Spanish resident you can access the public system. If you are under 65 this costs €60 a month, for over-65s it is €157 per month.

Spain has a double tax treaty with the UK, but the level you’ll pay depends on the region you live in and your level of income. Rates start from 18 per cent for state and occupational pensions but can rise as high as 54 per cent if your annual income exceeds £262,000.

Private pensions can be more complicated, and experts recommend taking specialist advice before drawing an income.

A word of warning though – if you take your ‘tax-free’ pension lump sum once you are a Spanish resident, it will be taxed.

United Arab Emirates

UAE offers year-round sunshine and plenty of amenities, but the real draw is its tax system.

While it has a double tax treaty with the UK, the fact there is no personal income tax means your pension is effectively tax-free.

The catch is the high cost of living. And while healthcare is excellent, private health insurance is mandatory with steep premiums.

Have you moved abroad for retirement? Tell us how you did it at [email protected]