Dream retirement becomes financial nightmarePosted on: 20 December 2011 by 50connect editorial
If you thought the recession was bad in the UK, spare a thought for those who retired and moved to Spain
More than five million British people are living abroad, often attracted by the prospect of good weather and good fortune. But for many, the dream has turned sour.
Some have even reached breaking point and been forced to return to the UK. They have few complaints about the climate, so what's gone wrong? Well, it's the economy, and if you believe you have enough to live comfortably in retirement overseas - maybe you'll want to read this cautionary tale.
The pain in Spain
Unemployment rates are rising fast in Europe and many expats are struggling to find work. Spain is one of the most popular expat destinations, but job opportunities are drying up.
Spain's unemployment rate hit 22.8% at the end of October 2011, more than double the EU average. The total number of jobless has now doubled over the past year from two million to four million.
The situation is also expected to get worse: the Organisation for Economic Co-operation and Development recently predicted the jobless rate would peak at 23% in 2012. The construction industry has been particularly badly hit.
Construction was once a thriving sector that was happy to employ British workers. But the building sites are no longer a feature of the Spanish landscape as developers halt construction projects.
France is another favourite destination for expats, but unemployment reached an 11-year high in 2011 with 2.78million out of work, creeping ever closer to the record highs of 2.8 million in 2000.
Around 26,000 people have joined the jobless queues in France since the start of 2011, fuelling discontent that has prompted demonstrations against the government's handling of the economy.
Unemployment has risen throughout the past 12 months and economists are predicting a further spike to a peak jobless rate of 9.6%.
High unemployment is obviously grim for the locals, but expats can often find it even tougher. They are not always the first choice with indigenous employers. The lack of language skills can also make their job prospects slim.
Retiring in the sunshine
Life is hardly any sweeter for people who don't need to find work overseas. They are suffering from the poor exchange rate.
Let's say you earn a salary of £2,000 a month in sterling. A couple of years ago, you could convert the wage into euros and expect a monthly income of €3,060. Now, you would be lucky to get €2,400 a month, a drop of 20%.
If you have to convert your sterling to pay a euro mortgage, the figures look even more scary.
The situation is also difficult for expats who live on a fixed income, perhaps from a British pension.
Neville and Maureen Hopkinson moved to southern Spain, near the Costa del Sol, in the summer of 2003. They enjoyed their life and found they could manage comfortably on a pension. But back in 2003 the exchange rate was much more favourable at about €1.50 to the pound.
Stung by exchange rates
When sterling began to slide, the Hopkinsons started to feel the pinch. "The economic situation seemed to go downhill rapidly. Prices were still going up in Spain, but we were losing out on the exchange rate when we converted my British pension into euros.
"We weren't the only ones who were suffering. Many expats were struggling to get by and like us they eventually had to move back to Britain. People think it's bad in the UK, but it's 10 times worse in Spain," said Neville.
And what about people who live on the income from their savings? The typical savings rate is now about 1.5%. After conversion into euros, they could be left with almost nothing in their French or Spanish bank account.
It's not as if the cost of living is falling along with the pound. In other words, many expats are bringing home less but paying out more.
"In the current economic climate, most people are feeling the pinch and anyone surviving on a pension, salary or interest payments from the UK will be hurting more than most," says Mark Bodega, director at currency specialists HiFX.
Volatility in the currency market has seen the value of sterling fall by more than 31% against the euro in the past 12 months. For some people with overseas properties, that will have meant a rise in costs that they just can't afford any more. Many who stretched their finances to fund their dream home in the sun find themselves unable to afford their Euro mortgage payments or just general living costs."
Supporting yourself overseas
A few years ago, the entrepreneurial expat could boost their income by letting out a converted barn on their land or taking in bed and breakfast guests. But now that's far from a sure thing.
The strength of the euro has put many British holidaymakers off from visiting the continent. Some are abandoning foreign holidays entirely. The number of visits abroad by UK residents dropped by 13% since 2009, according to the Office for National Statistics.
Caro Havers owns Finca Maridadi, a group of three villas on a private estate close to the historic town of Ronda in Andalucia, Spain. "I have lived in Spain for nearly 20 years and moved to Ronda from the coast nine years ago," she says.
"I have definitely noticed that demand from British holidaymakers has dropped off as the pound has fallen to almost parity with the euro. It's understandable; people want a good deal. But it makes life very difficult if you are trying to make a living from villa rentals."
The villas are booked during the summer holidays, but there are still vacancies for the rest of the year. "It has been jolly slow over the last month or two and I just have to hope that it picks up. But you can't take anything for granted in this market," Caro said.
Caro would do almost anything to avoid selling her properties, partly because the property market in Spain, as in many other EU countries, is flat.
Nick Barnes, head of international residential research at Knight Frank, says: "The world's housing markets remain under intense pressure with little real evidence of any of the hoped for 'green shoots'. The inescapable trend is that the worst and most widespread economic recession since the 1930s continues to batter housing markets across the globe.
"Rising unemployment and concern among those still in jobs, added to constrained credit conditions, means that buyer demand for housing remains suppressed and confidence is low in most markets, which is inevitably having a negative impact on house prices."
House prices in Spain are down about 24.5% since 2007, and the average figure masks some big falls in some areas, particularly around the Costa del Sol. In France the figure is near 9.3%, but again there are some big regional variations.
Playing the rate game
The Hopkinsons have first-hand experience of the Spanish property market and it's not all happy.
"Our property was on the market for over a year and we eventually sold it for the same price that we paid nearly six years ago: €250,000," says Neville.
But there is an advantage to the weak pound. "When we converted the euros back into sterling, we actually made a profit of about £35,000, so the strength of the euro actually worked in our favour," he added.
Stephen Hughes, director at Foreign Currency Direct, has noticed an increase in the number of British people who are willing to sell their property abroad at a discount.
"Depending on when Brits bought their foreign property, they can now afford to significantly reduce the asking price and still regain more in sterling than they originally invested in the property as a result of the weaker pound," he says.
"We would strongly recommend that anyone thinking about buying or selling property abroad pay close attention to the exchange rates in order to get the best possible value for money."
In a way the Hopkinsons are the lucky ones: they managed to get out before their money ran out. Some are stuck because they cannot shift their properties overseas. For them, the expat dream has turned into an economic nightmare.
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