Retiring overseas in a low cost-of-living country can be a great way to live a comfortable lifestyle on a modest budget. But there are also many pitfalls. Here are some traps you’ll want to avoid.
Living in Australia is expensive, especially if you’re living on the Age Pension or off minimal savings.
Increasingly, many Australian retirees are looking at leaving the country in order to make their money stretch further.
For around $2000 per month, a single person can live a comfortable lifestyle in many European and South-East Asian countries. Currently, the top five destinations for Aussie retirees are New Zealand, Italy, Greece, Portugal and Thailand.
But to make it work there a number of financial decisions you’ll need to make – and traps you’ll want to avoid.
Here’s what to consider before packing your bags and heading to the airport.
Read: Common retirement mistakes and how to avoid them
Age Pension
It’s possible to leave Australia for long periods of time and still receive the Age Pension, although your payment rate may change, based on how long you’re gone.
If you leave the country for less than five weeks at a time your pension rate and all supplements will remain the same.
Between six and 26 weeks (six months) your basic pension rate remains the same but the Pension Supplement drops to the basic rate and the Energy Supplement stops entirely.
After 26 weeks outside Australia your rate will depend on how long you were an Australian resident between age 16 and Age Pension age.
If you were a resident for more than 35 years in that time your rate will be unchanged. If you were resident less than that, your rate is reduced by dividing the number of residency years by 35.
For example, if you were an Australian resident for 10 years between 16 and pension age, you would be paid 10/35ths of the basic Age Pension.
If you relocate overseas permanently, for instance if you retire in spain but still meet these conditions, you’ll be paid the outside Australia Age Pension rate.
The exception to these rules is relocating to New Zealand, with which Australia has an international social security arrangement that in most cases will see you Age Pension remain the same as if you were in Australia.
Read: Four assumptions that could wreck your retirement
What to do with the family home
Deciding what to do with your Australian home before you leave is crucial. Getting the timing of this decision wrong can end costing you hundreds of thousands in capital gains tax (CGT).
Your principal place of residence is exempt from CGT, Mark Wilkinson, partner at BDO Private Wealth, told The Australian that changes when you relocate overseas.
“If you are departing Australia permanently and become non-resident, then the family home will cease to be covered under the principal residence exemption,” he says.
“Accordingly, if you are intending to depart Australia permanently, you need to consider selling the property before you become a non-resident to take advantage of the exemption.”
To make matters worse, the 50 per cent CGT discount for owning an asset for more than 12 months is reduced proportionally for the period you have been overseas since 8 May 2012. So, the longer you delay the sale of your home after moving, the CGT discount you’ll get.
Another option is to rent out your Australian home, but this too comes with tax implications. Non-resident’s are taxed at higher rates than residents and have no tax-free threshold. This means a tax rate of 32.5 cents in the dollar is paid from the first dollar earned, up to 45 per cent for income above $180,000.
Read: Why retirement planning must be personal
Superannuation
If you intend to use your superannuation to fund your overseas retirement, again there are tax implications for non-residents, and not just here in Australia.
Superannuation in Australia is tax-free for those aged 60 and over in an account-based pension up to the $1.7 million transfer balance cap. But depending on the country you move to, this income may be subject to tax there.
“The Australian superannuation pension is taxable in Indonesia for instance and may require the lodgement of an income tax return in Indonesia.”
Make sure you check the tax rules in the country you intend to live in.
Would you consider spending your retirement in another country? Which country would you move to? Let us know in the comments section below.
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