Beware the whirlpools of overseas retirement

Be it to the Rockies or Rhodes, Paris or the Pyrenees, nearly half of us want to retire overseas. The dream of heading abroad for good after a lifetime of work is now held by 45 per cent of us, according to research from the insurer Prudential.

Be it to the Rockies or Rhodes, Paris or the Pyrenees, nearly half of us want to retire overseas. The dream of heading abroad for good after a lifetime of work is now held by 45 per cent of us, according to research from the insurer Prudential.

Some 2.3 million people aged over 50 plan to emigrate within the next 10 years, says Alliance & Leicester International bank - many of them to Australia, the most popular destination for UK pensioners.

The latest figures from the Department for Work and Pensions show that 231,000 retirees have moved Down Under, Our second-favourite destination is Canada (146,000), followed by the US (118,000), Ireland (92,000) and Spain (54,000).

Beyond the dream, however, lies a financial reality that demands a great deal of planning to make sure such a life-changing event goes smoothly.

The impact of retiring abroad on your finances will vary between countries. For example, while you can receive your state pension overseas, it will not be increased in certain areas in line with changes in the UK. Some 500,000 pensioners have had their pensions frozen at the level paid out when they first left the UK for countries such as Australia, New Zealand, Canada and South Africa.

Personal and company pensions will still be liable for tax even after you have left the country. In most cases, once you have informed the Inland Revenue of your overseas residency, pensions will be paid gross to you and then taxed in your new country. However, some pro-viders only pay pensions into a UK bank, warns James Hender at the financial services group Smith & Williamson. In this scenario, you could lose if the value of sterling falls against that of your chosen country.

You'll also have to balance the amount of time spent in your new home and the UK for tax purposes, Mr Hender says.

Income tax has to be paid in Britain, as in many other countries, if you spend 183 days or more here during a tax year. In the UK, you will also be caught in the tax net if your visits average 91 days or more every year over a maximum of four years. All this could leave you liable for tax in both Britain and your new home.

In such cases, you'll need to know if your new home country has a "double taxation" agreement with the UK which means your income won't be hit twice; most popular retirement countries, such as Canada and France, do.

In most cases, you don't have to pay tax on interest earned from bank and building society accounts in the UK. However, you will be taxed on dividends from UK-based companies, interest from UK gilts and any property you rent out.

Some countries impose a "wealth tax" of 1 to 2 per cent on your assets. "If you keep a home in Surrey worth £1m, you could pay £20,000 a year tax on this," says Mr Hender.

You may not escape the clutches of the Inland Revenue even if you die abroad - it depends on your "domicile".

You could be non-resident but still UK domiciled, which means your estate will be liable for inheritance tax in the UK.

Your domicile is usually decided by where your father was born, although it is possible to abandon a domicile of origin and acquire a new one.

However, this is difficult and requires evidence of cutting ties, such as buying a home, taking up citizenship as well as employment, or starting a business.

In the event, you may need to make two wills - one for your UK assets and another for assets in your new country.

This is important because some countries, such as France and Spain, have forced heirship.

In Spain, for example, you are obliged by law to leave at least two-thirds of your property to your children when you die. This can cause problems if you have children from previous marriages.