By John C. Dyer, UK correspondent
It seems every summer I read an article which asserts a growing number of Americans choose to retire abroad.
I am not sure of the statistics but I can certainly understand the interest. When I decided to relocate to the UK all I could really tell you is I have had an itch to do so for as long as I can remember. Had Uncle Sam not come along in 1969 I was all set to attend the University of London on a Marshall to study economics and politics.
The draw for me was as much cultural ease, personal identity and family as a calculation of benefits. The annual “Americans retire to blank” articles, on the other hand, always cite the benefits of living in lower cost economies.
In the off chance these articles are more than puff pieces for travel agencies I thought I might share some thoughts concerning due diligence. Had I known this information before relocating to the UK last year I still would have done so, but I would have been better prepared.
Cost of Living is only one and one very temporary consideration.
Especially in this era of economic and social upheaval. Those of you who have followed my articles (or indeed the general press) know that Europe, in general, is in crisis. Particularly in crisis are Portugal, Ireland, Spain, Greece, all of which I understand have been retiree destinations, as has Egypt. We all know about Egypt.
Mexico is another destination mentioned in the articles. Although the drug wars and corruption may give some pause, I know from friends and at least one cousin who retired to Mexico that the enclaves of US retirees there feel relatively insulated. But they are not relatively insulated from cultural isolation and boredom. After a while the rush of new and exotic settles in to the day-to-day. It always does as the exotic becomes the familiar. Then the new arrival begins to feel a) out of place, b) with nothing meaningful to do, c) except with other Americans. Americans one knows, who were there throughout the ups and downs of life, are all back home. And home is where the heart is.
Taxes can have a significant impact.
One’s tax obligations are in almost all cases governed by a Tax Treaty between the US and the retirement country. While a boiler plate is at the base of all these treaties, be advised they are not the same from country to country. While all bill themselves as treaties to prevent double taxation, they are often, in fact, the facilitator of double taxation. I point this out not to argue for change but to bring it to the attention of the retiree considering a foreign retirement.
One particular clause can make a whopping difference. It is the “reservation” clause. In some treaties the US reserves the right to tax its citizens, wherever they may be, in accordance with annual changes in US law rather than the express terms of the Treaty. So, for example, under an express provision of the boiler plate Treaty social security and pensions are taxed “only” by the country of residence. But, if the particular treaty has the reservation clause I mention, despite the Treaty’s apparent meaning, IRS will expect a check. You have a US tax liability.
Watch out for the term “meaning of residence”
Even in those situations where the Treaty does not have that reservation clause language, there is a legal question as to the meaning of residence. It is unclear whether the term should be interpreted in its common usage as the flat one calls home or in its traditional legal sense of “presence with lawful intent to remain.” If one is not a citizen one may be there for a long time under a tolerant host policy toward foreign residents, but not able to legally form an intent to remain. They can kick you out any time.
IRS will not advise one in advance on this subject. There is an internal directive to its customer service representatives that tells them this area is murky and they must not give advice. I remember vividly the feeling of playing Russian roulette as I filled out my US tax forms last April. Oh, and yes, wherever in the world one may be, however one makes money, under whatever Treaty provisions, one must file each year.
In the UK, a long term foreign resident who is not also a citizen may file for non-domiciliary tax status. The beauty of doing this is one pays the UK a reduced tax rate. In filing US taxes one can take a credit to offset those reduced taxes. But, if one takes advantage of these provision and remains years, down the line a now £50,000 lump sum surprise penalty awaits. If one takes advantage of those provisions one had better have a plan for leaving the country within 5-6 years. One also does not qualify for NHS coverage. More on this in a bit.
If one does not take advantage of the non-domiciliary provisions, one pays full freight in UK taxes. Social Security under the UK/US Tax Treaty is paid only to the UK. Social Security will even pay one in pounds by direct deposit. I am just not clear and cannot advise as to the treatment of other pensions for a non UK citizen (or on earning money in the UK or elsewhere). I can only highlight the issue. Having spent hours reviewing the issue, I must sadly warn in advance I receive 9 different answers from 7 “experts” on the subject of how the IRS treats pensions for a US citizen living in the UK. I solved it for myself but I am a dual citizen. How many dual citizens are there who relocate to the UK in retirement? Apparently not very many.
Health Insurance is another major big deal.
My lovely CAL PERS group health insurance was no good in the UK. Neither is MediCare, by the way. I fortunately qualify for NHS. Not everyone does. Not everyone who does would like the NHS. Its culture, established during WWII rationing, may in fact come as a cold shock to the US retiree used to the gold plated, customer oriented US system for those who have health insurance. I don’t know the deal in other countries, but I would caution the retiree, buddy, more inevitable even than taxes is growing old and running to the doc for increasingly expensive treatments. How to pay for it all is a big question that cannot be left to chance.
Exchange rates and money transfer pitfalls
Another major big deal is exchange rate and, of almost independent importance, how to get your money transferred from the US to your new home. I know the answer for the UK, if you have a Visa debit card to a US account and don’t need a really big chunk at once. My US bank allows me to transfer by debit card up to $300 a day standard and up to $500 per day by arrangement, without charging a premium for the service. This is a pretty important deal, because the premium is often 6% added to the exchange rate on top of a transfer fee. You might not even notice it because the premium will be folded into the exchange rate quoted. Remember, wherever you may go, money earned in the US has to be translated into local currency.
Speaking of prior arrangements, make as many arrangements as you can in advance with banks, pension funds, IRS, etc. Once you are out of the States it is infinitely harder to get something done. Maybe the consequence of 10 years of Security Consciousnes.
A stranger in a strange land
I mentioned the feeling of being a stranger in a strange land. A parallel consideration of significance is the attitude of locals to foreigners. It seems to me it would be particularly true in a land chosen for low cost of living that the locals would need and resent the rich foreigners. I remember thinking this as a friend told me he was going to relocate to Mexico because he could afford a maid and a cook. Dirt cheap. Dirt cheap charging you but resentful of you for thinking and paying them so, I reckon.
I have not, for the most part, felt like a stranger in a strange land in the UK, except for 3 interesting niggles. The “take that” rationing culture of much of the service industry. From banks to retail shops, the US concept of customer service is not typical. The second is that the UK tax system operates on a Tax Year from April to March, with payments made from the following April through January. Additionally the reporting cycle is staggered rather than once on Mid April.
The third is driving on the left hand of the road. I was able to cope readily with the going down the correct side of the road bit. I have struggled with the size of the roads and knowing where my left-bumper-is-thing. It is stunning how the movement from the left of the vehicle to the right of the vehicle changes everything in the eye to wheel coordination, especially in tight spots. I have adjusted to each of these. They are not a problem I can’t solve, but the point is, wherever you go there will be such adjustments.
WARNING IF YOU BELIEVE YOURSELF ELIGIBLE FOR DUAL CITIZENSHIP:
Contrary to what you might be told by US customs, the US does recognize dual citizenship. It does not encourage it but does not ban it. But the US cautions that such a status creates divided loyalties and a risk of inadvertently raising issues with one's US citizenship. For allegedly that reason the US insists that one use one's US passport both entering and leaving the US. This can have advantages. If you spouse is not a US citizen he or she travels with you without green card. I learned this the hard way trying to enter the US on a British Passport. A friendly customs agent clarified the deal for me. I am fortunate in that at least for the present the challenges of divided loyalties are minimal. I am careful and it is enough. But all circumstances are transitory and some other low cost locations are not similarly blessed.
Have an exit plan for tomorrow, regardless
Finally, I recommend that even in the best of situations today, have an exit plan for tomorrow. Stability is famously transient. One thing I think we all forget is that citizens of the US in the US have a framework of law and custom in which we all were raised, accept, and cherish. Even in the UK, the framework is different even for citizens, much more for noncitizens. Again, just two examples- exchange rate and the location of one’s pension account. Think about it.
I am satisfied with the choice I made. I do not seek to change the law. But I do advise careful consideration to the US citizen considering the adventure of retiring to another country. It is irritating in a way to be reminded of the “o” word when one is contemplating something one may have wanted to do all one’s youth but is only now in retirement able to take it on. But the “o” is sadly non-negotiable. Be sure of your plan.