No one can offer a blueprint for perfect retirement. Life’s experience, knowledge, preferences, capabilities and what is expected from retirement are some factors to be considered. It is a period of change, a transition from one stage of life to another. At retirement people are faced with a change of role, responsibility, relationships, ways to use time, challenges to personal philosophy and changes in financial position. The major changes can be summarised as income, health and lifestyle.

PLANNING YOUR INCOME

Sources of income at retirement are usually:

• State retirement pension;
• Company and personal pensions;
• Investments and savings.

State retirement pension

The UK state retirement pension is made up of the following components:

• Basic pension.
• Graduated pension.
• Additional pension.
• SERPS – State Earnings Related Pension.
• Any extra pension for dependents.

The size of pension depends on the contributions made to the National Insurance Scheme during a person’s working life in the UK and how many of those years were qualifying years. Retirement pensions are paid to beneficiaries at the rate prevailing in the UK if resident in Spain, although this is not the case with all countries.

Company and personal pensions

The principal of pensions is straightforward, but constant changes in the law have allowed a greater number of options. In an occupational pension one or more parties have invested money over a number of years. The pension is paid out, usually with an inflation element, according to the rules of the scheme as set by the trustees, based on final salary and the number of years in the scheme.

Annuities however are a bit more complicated. An annuity is a regular income bought with a lump sum. In the last 10 years annuity rates have fallen by 50%. They are based on the average life expectancy and long term yields on government bonds. Life expectancy has increased and yields have fallen which is bad news for annuities.

There are three types of annuity. Level annuities are paid at the same amount each year, but the purchasing power is eroded by inflation. Escalating annuities ratchet up by a set percentage each year, but the bigger the escalation, the lower the income to start with. Lastly, index linked annuities can follow routes such as the Retail Price Index. Recent changes in UK pension law have allowed greater flexibility with regard to annuities.

Some pensions are best left alone. Some better converted to annuities. A flexible pension, taken out in the later years of life according to one’s need is excellent. A choice of pension is a major decision. Once done, that is it, for the rest of your life.

One final thought. ‘People need to appreciate that they cannot work from 25 to 55 then live the life of Riley to 95,’ so stated the Chairman of the National Association of Pension Funds. He may be right, or he may be wrong. Appendix 4 provides a template for a do-it-yourself ready reckoner to calculate income before and after retirement.

Investments and savings

Investments are more flexible, although each one should be entered into with a long-term strategy. Investments are about risk, with risk being relative to each person. Reward follows risk. It is the law of economics.

Risk can be categorised, ranging from low to high, but most investments focus on geographical, sectional and equity risk. Geographical risk involves a part of the world such as the UK, Europe, or the USA. Sectional risk involves investing in a sector such as technology, retail, or food. Equity risk relates to the investment type such as bonds, shares or unit trusts.

At the lower end of the risk ladder are building societies, corporate bonds and government stocks. Going up the risk ladder are tracker funds that mirror stock exchange performance and shares in companies. Near the top are overseas investments or themed investments such as technology stocks. At the top are volatile futures dealings.

Inheritance trusts

Protection from taxation and inheritance legalisation can be achieved by setting up an offshore trust fund which initially sounds expensive and complex, but in practice can be achieved simply by organisations specialising in this type of work. Protection of a Spanish property from inheritance tax is not possible under a trust.

Getting professional advice

Financial advisers based in the UK may be independent and able to choose from any company’s services. They may be tied agents who only offer the range of products from the investment house that employs them. Insurance companies too have their representatives, but they may also employ others on a freelance basis to represent their products.

In most European countries these agents will be members of a recognised professional organisation, be independent and subject to legal scrutiny. Before choosing an adviser, do they know about Spain, Spanish taxation, offshore investments, and Spanish inheritance tax? If not then find an alternative adviser. It is a waste of time undertaking financial planning embracing the laws of another country when it is the laws of Spain that have to be understood.

Spanish financial advisers are not as well regulated as those in other countries. They even sell their ‘own label’ products. It does not mean they are bad. It simply means that one has to be that little bit more cautious when dealing with money matters in Spain. When dealing with investments, the quickest way to double your money is to fold it in half, put it back in your pocket and not to be seduced by newspaper advertisements offering exceptionally high returns.

Investing offshore

The term ‘offshore’ has no legal definition. The reference to offshore infers that private investors are making financial transactions in a jurisdiction different from their normal residence for tax purposes. It is thought that half of the world’s capital is invested within International Offshore Financial Centres also known as tax havens.

The best-known close offshore centres are the Isle of Man, Jersey, Guernsey, and Gibraltar. Land-based popular offshore centres are Luxembourg, Switzerland and Liechtenstein. The more distant well-known offshore tax havens are Bermuda, Bahamas, and British Virgin Islands. There are more than 50 well-established international tax havens.

Why invest offshore? The most common reason for private investors to place capital offshore is to reduce income tax. Banks and financial institutions invariably pay less tax in respect of subsidiaries based in offshore locations. For example, identical insurance investment funds based in London and the Isle of Man would not perform the same. This is because UK based companies deduct tax at source on income and make allowances for capital gains tax on unrealised gains. The same fund located offshore would suffer little or no tax.

A word of warning! The law of Europe is changing. Offshore banks are now obliged to disclose any interest gained in bank accounts to the tax authorities in the country where the account holder resides. Luxembourg is exempt from this legislation for a number of years. It is speculation that further legislation may occur limiting the benefits of offshore investments.