Financial Top Tips in Spain

Thanks to everyone for their positive feedback on these newsletters. They are purely to give us ‘foreigners’ the heads up on financial matters that are at best opaque here in Spain. Before I head off to a chiringuito, as it’s that time of year, this month we shall be concentrating on the following important topics:

• National Insurance deadline to backdate/buy years in the UK – act now!
• What pension are you likely to receive as self-employed/autonomo here in Spain?
• How much money do I need to retire (with example) comfortably?
• Legal aid in Spain for British nationals

UK National Insurance deadline approaching

I meet many people who have contributed into the UK state pension (National Insurance contributions) and then move abroad. They may also pay into other countries´ state pensions, but the BIG potential issue is that no one knows for sure if these will be combined and what income in retirement you will receive. Some people say ‘Well they have to, otherwise it’s not fair and that’s how it works now/used to before Brexit’. I tend to focus on as many certainties as possible and always try to have a ‘more guaranteed’ plan instead of relying on what governments do and don’t do, as that doesn’t fill me with confidence.

I have met many people with 5 years’ state contributions here, 10 there and another 5 somewhere else and they don’t actually end up receiving ANY state pension. This is not the situation I want to end up with and that’s why I recommend to anyone who has existing UK NI contributions to continue to contribute to them, aiming to reach the maximum years needed to receive a full UK state pension. As a non-UK resident, if you are paying taxes in Spain it´s normally £12 a month to contribute to the UK system – for me it’s a no brainer.

With that in mind, normally you can ‘backdate’ or buy past years’ contributions to fill in any gaps you may have. However, from the end of July (next month), you will only be able to backdate 6 years, whereas before this deadline you can buy more. So, if you have significant gaps in your UK NI contributions you only have until next month to ‘fill’ a part of them. You can find out more here: National Insurance Gaps

Self-employed/autonomo state pension amounts

I wanted to clarify something that not many people here realise when they contribute into the social system as self-employed. In the UK you pay your contributions and the number of years you have contributed dictates, more often than not, how much you receive. However, this is not the case in Spain.

Many people are autonomo here and presume the monthly payment they make to the social security, if made over the necessary number of years, (currently 35), will give them the full Spanish state pension – unfortunately that is incorrect.  That is because it’s not JUST the number of years you contribute, but also the amount you pay. Not many accountants will confirm that there is a choice on how much you can pay each month towards your social security – a low, medium or high amount. Therefore, most people pay the low amount for many years and only realise the problem when they start looking closer, usually at retirement age. I hope most people are sitting down when I tell you that if you paid the minimum contributions for the full number of qualifying years in Spain, you would receive around €643 a month, (almost half of the UK amount), whilst the maximum is €2,617.

That is why I recommend to almost everyone that they ensure as far as possible that they are fully contributed into the UK system by retirement.

Here are the links to HMRC to read about and organise this, (please don’t get in touch with me for help as it has to be done by yourself):

• Information on paying National Insurance contributions from abroad – gov.uk/national-insurance-if-you-go-abroad
• The Form to complete to pay Class 2 voluntary contributions at £12 a month – gov.uk/government/publications/social-security-abroad-ni38

You can obtain a state pension forecast here in Spain if you have a digital certificate here

As a local accountant recently told me, and I quote, “My personal opinion is that it is better that you make your own pension, saving the money and investing it directly, and more because each time the pensions are reduced year by year and it is quite sure that in the future they will be reduced most, but this is only my opinion…… This is what I decided to do a long time ago.”

So, my advice? Pay the minimum here, pay your NI in the UK and reach the maximum alongside making your own provision along the way.

Therefore, one could surmise an income needed in retirement of €4,000 per month before tax could be the average amount required. If we say you receive the full state pension of around €1,000 per month, you need to supplement €3,000 per month.

If you had €300,000 and it gave you 5% return each year this would give you €1,250 per month – so we still need another €1,750 per month. Of course, this means that as you are taking the full interest earned from your money pot it is not keeping up with inflation. Therefore, taking 4% at most is more applicable which gives you €1,000 per month income. However, if this income falls under income tax (such as property income), then from earnings upwards of the current allowance of €6,700 each year at age 65 in Spain you will be taxed. Adding that to the state pension, (which is declarable for income tax in Spain), we probably need to say it’s more likely €800 a month net from this monetary income.

So, we see the problem, what do we need to do? In essence, make your savings/monies and assets work for you over the years with professional management, taking into account tax mitigation. The more money you invest and the longer the time, the more comfortable or higher probability you will achieve your goals.

By the way, the answer to the above question also depends on how you are receiving the income. Tax efficient savings will greatly reduce you tax liability away from income tax to the lower, (and with possible offsetting capability) of capital gains tax. In monetary terms, to be safe I would suggest €800,000 plus a property rented out in retirement, in today’s money, as an income will safely achieve this. Is that the average persons situation?

Legal aid in Spain for British nationals

The UK has just released the following information on legal aid available for those residing in Spain which is perhaps ‘better’ than I would have expected and well worth knowing: Legal Aid Spain

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If you would like any more information regarding any of the above, or to talk through your situation initially and receive expert, factual based advice, don’t hesitate to get in touch with Chris.