Retiring overseas can be nice if you’re not overly attached to your present location. Aside from the climate, there can be financial benefits to consider for the savvy retiree. It is important to understand how to take advantage of the mechanisms in place to avoid paying taxes twice and incurring a penalty, however.
The way you handle a pension overseas varies depending on where your pension is based, and on where you live. The USA likes to tax based on citizenship, rather than just residency, so if you have a US based pension then you are at risk of being double taxed unless you pick a country that has a tax treaty with the USA. Each country has slightly different parameters, so be sure to know what you are getting into before you move.
If you do it right, this can leave you paying lower taxes to your host country than you would at home and none to the IRS, all while while enjoying a lower cost of living.
Both a regular American based pension and your social security benefits will be subject to regular American income tax as long as you maintain both American residency and citizenship, so it is important that you give up residency in the U.S. Dealing with foreign based pension can be even more complicated, but it can yield more lucrative results.
For example, if you work for a UK firm and get a UK based pension, you can transfer the whole thing into a qualifying recognized overseas pension scheme (QROPS). This would normally still cost you U.S taxes because the IRS doesn’t recognize most UK pensions, QROPS or otherwise, which then don’t get any of the treaty protections that have been negotiated. A clause in the tax treaty with Malta, however, recognizing Malta based QROPS, allows Americans to get the full benefit, exempting that income from U.S taxes. Wherever your pension is based, there will be mechanisms like this in place, so do your research and don’t settle for being double taxed.
While the 2010 Foreign Tax Compliance Act does show that the U.S government remains dedicated to bringing in taxes from offshore assets, this isn’t something for a regular expert to worry about. It is designed to target major off shore tax havens that exist for rich people to dodge their taxes, not for regular people actually living abroad. There are built in provisions and protections for Americans who actually have residency abroad.
Living abroad can be a rewarding and enriching experience, but it is the sort of life step that comes with risks that require serious research and planning to avoid.
Mario Vitanelli is a freelance writer and blogger currently working with QROPS Group. He specializes in international politics, finance, retirement and investment. His areas of expertise include European, Asian and Latin/South American economic policy.