January 2008

The great escape

After last month's performance by the English football team in the European Championships, their outgoing manager may well have looked abroad to escape the pressures of living and working in the UK. He would be one of a growing trend of British people who are emigrating (400,000 people in the past year, up by more than 40,000 on the previous year, according to the Office for National Statistics) to work or to spend their retirement, attracted by the promise of warmer climates and a slower pace of life.

The pitfalls

However, how easy is it to retire abroad and what are the benefits and pitfalls? When should planning begin and what sort of offshore options are available?

For a while now, the Government and banks have been warning consumers that they must save more for retirement. However people plan to spend the time period after they have stopped working, it will inevitably cost money. It is important to plan ahead to save as much as possible in the most tax-efficient way to increase the chances of having enough money to retire comfortably. UK expatriates must also consider how the terms of their company pension may change if they move abroad to work.

From a UK perspective, pension schemes and arrangements form the second pillar of retirement provision following social security pension benefits. Some may be lucky enough to be able to continue to save into a UK pension if they live abroad. However, the expatriate who has been absent from the UK for many years may not automatically be entitled to a social security pension and, in addition, may not have participated in an employer's superannuation scheme or retirement benefits scheme while working abroad. This, therefore, places greater emphasis on the importance of making "self provision" for retirement.

The need for advice

While the UK has a range of packaged pension options driven by domestic tax legislation, the reality of the matter is that an 'offshore pension' arrangement does not exist. Therefore, depending on whether you have a lump sum to put towards retirement provision, or want to make regular savings (or a combination of the two), it is absolutely essential that advice is taken from a qualified professional.

When assessing the client's needs the adviser will aim to provide bespoke financial solutions by establishing how much money will be needed in retirement, identify shortfalls and examine expectations.

While retirement is a long term need for many, it is important to understand that the need is urgent and that plans should not be put on hold in favour of satisfying shorter term goals out of savings. After all it is time in the market which is important.

It is likely that long term retirement planning will involve investment into real assets such as stocks, shares and mutual funds. The adviser should establish the client's risk profile by understanding their capacity for risk relative to desired return, risk tolerance and overall time horizon. From this it will be possible to make recommendations for a diversified, tax efficient portfolio of investments, as asset allocation is key to long term portfolio returns.

Once an appropriate plan has been established it is essential that it is reviewed at least annually thereafter. Problems arise however where the individual is highly mobile, moving from country to country on a regular basis. This is because cross border regulations generally preclude advice being given locally on the ground by individuals who are not registered in the appropriate jurisdiction. It therefore follows that clients will need to find a new adviser every time they move.

Advisers in the UK have an important role to play in retirement planning. Their role is key to organising a comprehensive financial plan coupled with a sound investment strategy, while encouraging clients to plan for a sensible retirement lifestyle. Advisers should also review and re-adjust their client's portfolio regularly and whenever priorities or circumstances change.

Robert Sheasby
Senior Propositions Manager
HSBC Bank International