Expat money: Financial Challenges We Tackle
There are more than 6 million Brits living abroad, a third of whom are pensioners, and more than 12 million foreign-born citizens in the UK. The most popular destination for UK expats is Australia, with over 1.2 million British citizens residing there in 2013. The United States and Spain come second, with over 700 thousand in each locale, and of course France and South Africa are also in the top 10most popular countries for Brit expats list.
1. Money transfer challenges
When you make the move abroad, you will need to bring in money from the UK or into the UK. If you are a pensioner, or a student receiving an allowance from family, you will have to do so on a regular basis. International money transfer can be tricky and expensive. This is because:
- Money transfer fees: you will be charged fees for foreign currency payments. This means that you’ll never receive the amount that was sent. Banks are notorious for their high money transfer fees. This can be a big chunk of your income.
- Hidden costs: banks are also known to be a bit sneaky when it comes to international money transfers. Just about every bank hides extra fees in the foreign exchange rate they give you. The bank’s rates are always different from what is called the mid-market rate, and it’s always to their advantage. Talking about exchange rates…
- Fluctuating currency rates: if you’re receiving money from abroad on a regular basis, fluctuating exchange rates could leave you with a different amount every month. It becomes difficult to plan your spending, and is a common cause of anxiety to expats all over.
- Execution: then there is the matter of the execution time. Banks take a while to process the payment, and you might be waiting a week for your money to come in. If there are bank holidays that month, it might be even longer.
- Opening an offshore bank account to receive payments in domestic currency.
2. Reporting and taxation
Reporting your income for tax purposes is daunting even when in your home country. Bureaucracy is notorious for being confusing and petty. When you’re living abroad you’ll have to get used to a new system.
The following are the most common questions:
- do I need to report income from the UK?
- will I still be taxed in the UK?
- will I be taxed on my pension?
- will I be taxed on income already taxed or tax-free in the UK (and vice versa)?
- what documents do I need?
- who do I liaise with?
- should I hang on to my UK bank account?
3. Obtaining loans
If you’re considering buying property abroad, or getting any sort of capital, you will face the reality that you no longer have a credit record. While this can be beneficial if you had a bad credit record in the UK (although not necessarily), it will prohibit you from getting any sort of loan.
You can bring proof of your UK credit record with you, but this will not necessarily be recognised. Even if it is, it may not be enough for a financial institution to trust you with a large amount. You will have to build your credit record from scratch, and should plan for this in advance. The problem with this, which you might have faced during your initial working years in the UK, is that most places won’t give you credit until you have a history. But you can’t get a history until you have credit!
4. Cheque accounts and store cards
There are, however, a few ways to build a credit rating. You can open a savings account, and after a period of good money management, it might help (depending on the country). Other options are to get store cards. Stores don’t usually demand a credit history, since there is less at stake. As long as you pay it up regularly, this will go on your credit record.
5. Utilities in your name
Another way is to get utility bills sent to you in your name. The evidence that you’re paying utilities on time on a regular basis is something many lenders will take as a sign that you’re a safe option.
6. Employment history
This, of course, is going to take a while, but once you have a good employment history, credit companies will take you more seriously. They’ll see that you’re able to hold down a job and bring in a steady income.
7. Pension transfers
Up until April 2015, UK law made it impossible to withdraw more than 25% of your pension at once. At least 75% had to be put into an annuity. This changed with new legislation which now allows you to withdraw all of it if you want.
This has implications for moving pensions overseas. If you have your pension in an annuity, you’ll have to transfer money each month. The transfer challenges we mentioned overseas will apply. More and more expat pensioners are choosing to move their entire pension abroad at once.
Fortunately, all of these challenges have solutions. Millions of expats have made it work, and continue living comfortably in spite of the financial difficulties.
Foreign exchange companies
While it’s tempting to do all our financial transactions through the bank, when it comes to foreign exchange, banks are the least efficient and most expensive intermediaries. As we mentioned above, they charge excessive fees, hide extra fees in the exchange rates, and take days to process.
Foreign exchange companies, on the other hand, can help solve all of these problems.
- Money transfer fees: many foreign exchange companies have no fixed transfer fees. They either take a small percentage, or base the fee on the size of the transfer. Either way, they are always cheaper than the banks.
- Hidden costs: foreign exchange companies do not usually hide costs in the exchange rates. Always look for those that offer the mid-market rate (which you can find online). Some do include fees in the exchange rates, but they break down exactly where and why.
- Fluctuating exchange rates: there are ways to ensure that fluctuating exchange rates don’t hit you too hard. Foreign exchange companies offer services like forward contracts, which allow you to set a fixed exchange rate for up to 2 years. Furthermore, since this is their area of specialty, they have agents available to help you choose the best options, and figure out the best times to make your transfers.
- Execution: again, since this is their focus, they do not take ages to process your transfer. You can often get same day transfer, instead of waiting a week.
- Sophisticated platforms: unfortunately, banks seem to work a few years behind everyone else. They are generally not the early adopters of technology. Foreign exchange companies, on the other hand, exist because of their innovativeness. Their sophisticated online platforms make it easy to transfer money abroad, as well as setting up regular transfers with little hassle.
Asking for help on reporting and taxation
Another advantage to using foreign exchange companies is that they’re experts on expat banking. Since they deal with expats on a daily basis, their staff can help you with tax forms, pension forms, and negotiating your way through what can otherwise be a bureaucratic nightmare.
Much of the time, the problems you’ll face will be due to the fact that you can’t possibly be familiar with all the laws and fineprint. The obvious solution is to ask for help, but often we assume others will be in the dark too. If you don’t use a foreign exchange company, you can browse through websites like this, dedicated to expat matters. We’ll include a list of the most useful expat sites available. Also financial advisers are a good option – view our article on this topic to find the best ones. You will need them if you are moving abroad or moving money to a trust fund in Jersey.
Pension reforms free up your money
As we mentioned, it’s difficult to get a loan abroad due to your lack of a credit record. This makes it almost impossible to buy property or other large assets. For those with large pensions or other sources of income, the pension reforms can help.
Instead of taking out 25% of your pension, you could take out 50% or more, leaving the rest in an annuity. Of course, if you’re relying on your pension to put food on the table for the next few decades, you probably shouldn’t take too much out of the fund. But if you do have some financial freedom, there are a number of possibilities because of these reforms.
Prepare to build a credit record
As we pointed out before, it’s not difficult to build a credit record. It just takes a bit of time and patience. In some states in the US, for example, you need to live there for 6 months before you can be considered for credit.
There’s not always an easy solution, but knowing this in advance goes a long way to getting you there. If you plan to buy property, for example, find a place to rent in the meantime. As long as you are prepared, you’ll be fine.
Avoid Expat Scams
Expats are an easy prey for some con artists. They are new in the country and aren’t aware of local procedures, and many of them are pensioners. Read this article on how to avoid con artists as an expat. Avoid more common expat mistakes by reading this.
Consider International Healthcare
Read about international healthcare on this article and learn how to maximise your coverage without being ripped with excessive fees.
Good luck! View more information on our Expat Money Channel.