The hullabaloo surrounding the 10 billion euro bail out of Cypriot banks is a warning signal of what the future may hold for retired expats.
Cyprus is one of a number of safe havens luring expats with offers of low tax rates on retirement income.
But the concept of tax havens is fast disappearing as a group of nations led by the US and Britain change the financial landscape with new laws forcing secretive banks and financial institutions to pass financial information about account holders to tax authorities.
The Cyprus bail out has exposed how these deals work for expats.
Cyprus offered around 30,000 expats a 5% tax rate on their pension income and interest earned off their investments, no inheritance tax and no wealth taxes.
Tax treaties are no protection
Other nations offer similar deals in a bid to earn a crust off expats – some Latin and South American countries woo US expats to live the dream, notably Panama and Ecuador. Panama also offers banking secrecy and offshore corporate services.
Some sunshine islands and Central American nations are a financial paradise for expats, like Belize, Turks and Caicos and British Virgin Islands.
Financial advisers sell financial security to expats on the basis of double tax treaties – after all what could go wrong if the British government has penned a deal with the country where an expat emigrates?
Spain, Portugal, Ireland and Cyprus are now examples.
Malta and Luxembourg fear they may also face the glare of the European Union and International Monetary Fund. Both nations have banking sectors that are out of proportion with their economies, a key to the failure in Cyprus.
Warning signs
The warning signs are there for expats – the temptation to trade financial security against less tax is always present, but like investment, greater tax returns come with higher risks.
Expats should make sure that they understand the risk and should separate their finances from where they pay the lowest taxes.
For instance, transferring British pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) will save tax – but make sure the QROPS is in an economically sound jurisdiction, even if the taxes are slightly higher.
Another important back stop is whether an adequate financial compensation scheme is available for money on cash deposit.
Splitting money between banks trading on separate licences may minimise interest returns, but safeguards against losing huge amounts of capital, which seems to be another keynote failure in Cyprus.
