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What it really costs to move to Portugal: Your pension and savings go a LOT further – and you’ll pay less tax

With a career in the Royal Navy and the Ministry of Defence, Peter Reynolds and his wife Karen were used to moving house. While Peter hails from Scotland, the couple lived in Portsmouth and Eastleigh with postings to Hong Kong and Gibraltar.

And when it came to retiring, they knew they wanted to settle abroad. After many happy holidays in Portugal’s Albufeira, they found a rustic property 15 minutes inland of the Algarve’s biggest tourism resort.

One of the advantages is that in the restaurants of their village, Cerro do Roque, they are typically surrounded by local workers rather than tourists.

When they tuck into bread and olives, followed by piri piri chicken or pork and clams washed down with a beer or a glass of local vinho verde, that menu do dia (menu of the day) costs just €10-12.

In 2022, the couple fell in love with a four-bedroom quinta – or rural house – with a small swimming pool surrounded by a large garden of fig, almond lemon and loquats trees that they bought for €330,000 (£278,000), less than they received for the sale of their four-bedroom house in Eastleigh, Hampshire.

Peter Reynolds and wife Karen knew they wanted to settle abroad in their retirement and after many holidays in Portugal's Albufeira, they decided to move there

Peter Reynolds and wife Karen knew they wanted to settle abroad in their retirement and after many holidays in Portugal’s Albufeira, they decided to move there

In 2022, the couple found a four-bedroom rustic property 15 minutes inland of the Algarve's biggest tourism resort, which they bought for ¿330,000 (£278,000)

In 2022, the couple found a four-bedroom rustic property 15 minutes inland of the Algarve’s biggest tourism resort, which they bought for €330,000 (£278,000)

The house has a small swimming pool surrounded by a large garden of fig, almond lemon and loquats trees

The house has a small swimming pool surrounded by a large garden of fig, almond lemon and loquats trees

‘Peter’s pensions and our savings go a lot further than they would back in Hampshire,’ says 64-year-old Karen, who used to run the family hair and beauty salon, Classic Cuts. ‘We definitely have a very comfortable life here.’

In fact, along with the sunshine and a more relaxing lifestyle, the affordability of living in Portugal remains a big driver for retirees across Europe. In the past decade, Portugal’s population of foreign retirees has more than doubled, with British expats accounting for 19 per cent of it, according to the Portuguese Statistics Department, ProData.

It also helps that Portugal is one of the safest countries in the world – rated 7th best in the 2024 Global Peace Index, the highest in southern Europe – and last year there were 45,218 UK citizens living there, nearly three times the number in 2013, according to the Portuguese border and immigration authority. 

The cost of living in Portugal is 37.5 per cent lower than in the UK, when food and everyday expenses such as transport and utility bills are compared, according to Numbeo.com.

Housing is not included in the calculation, and property prices in Portugal held up more strongly than many Eurozone locations in 2023 – up 7.8 per cent, year on year, according to Eurostat. The popular Algarve is relatively expensive compared to the country’s interior, with the average property in Portugal costing around €150,000 (£126,867), according to Idealista.com. 

In contrast, the average price of a detached house in Eastleigh sold in March 2024 was £533,000, according to the Office for National Statistics. But it is on annual property tax where there’s a real cost saving. In Eastleigh, the average (Band D) council tax is £2,137 per year – on Peter and Karen’s house it’s €167 (£141). 

Although it doesn’t apply to the Reynolds’ property, for homes worth more than €600,000 there is also an additional property or AIMI tax at 0.7 per cent of its value, but a couple can ‘pool’ their allowance so the tax is only payable on properties worth €1.2 million or more.

Karen, 64, who used to run the family hair and beauty salon, Classic Cuts, says she and Peter live a 'comfortable life' in Portugal

Karen, 64, who used to run the family hair and beauty salon, Classic Cuts, says she and Peter live a ‘comfortable life’ in Portugal

Peter and Karen hope to enjoy many more years in their new Portuguese home. They both love pottering in the garden and heading to the beach

Peter and Karen hope to enjoy many more years in their new Portuguese home. They both love pottering in the garden and heading to the beach

The restaurants in the village where Peter and Karen live are fairly cheap. The menu of the day at one restaurant costs just ¿10-12

The restaurants in the village where Peter and Karen live are fairly cheap. The menu of the day at one restaurant costs just €10-12

Along with the sunshine and a more relaxing lifestyle, the affordability of living in Portugal remains a big driver for retirees across Europe

Along with the sunshine and a more relaxing lifestyle, the affordability of living in Portugal remains a big driver for retirees across Europe

In the UK, the sum of £43,100 is required for a pensioner to enjoy a comfortable retirement, according to The Pensions and Lifetime Savings Association (PLSA), or £31,300 a year for a ‘moderate’ lifestyle. In Portugal, retirees can live comfortably on €1,300 to €1,500 per month – €15,600 (£13,147) to €18,000 (£15,168) a year – according to relocation advisory company Global Citizen Solutions.

At 67, Peter benefits from a full UK state pension (£221 per week) plus his index-linked naval pension and a Ministry of Defence pension from his career in the Royal Navy. It was when he was posted to Gibraltar that the couple first began to drive up to Albufeira for holidays.

Portugal has not been immune from food and fuel inflation. The cost of the Reynolds’ weekly food shop is around €80 to €100 a week – a little lower than what it would be in the UK. But it’s the fact that the couple don’t have to pay for healthcare that is a huge bonus – once they became resident they were able to register for the health service, or SNS, which (unlike the Spanish equivalent) they don’t need to pay into.

 The couple’s household bills are very low too. Karen says they pay €70 a month for water, €60-80 for electricity and around €40 a month for gas bottles as they are not on mains gas. The wholesale cost of electricity in Portugal in April 2024 was at its lowest point in more than five years, according to Statista. 

The Reynolds’ TV, phone and mobile package is €60 per month, and their home insurance just €120 (£103) a year – half the current UK average of £212 per year, according to Go.Compare. It’s also cheaper to run a car in Portugal, says Karen.

Insurance is €300 (£254) per year – including breakdown cover – and tax €120 (£101). The MOT (or IPO) is €35 (£30) after the fourth year of ownership from new, then every two years.

Peter can already take advantage of OAP discounts. Over-65s get half-price train and bus fares, plus the same (or sometimes free entry) to museums, along with lower rates at swimming pools and sports centres.

Cost-conscious retirees avoid the tourist hot spots, says Karen. ‘In a local cafe we pay around €2.50 for coffee and a cake – such as the typical custard-tart accompaniment, pastel de nata. If you go into Albufeira that might be €7.50.’

The same applies to a glass of wine or beer. ‘We tend to pay €1-€2 for a beer locally, and although it might cost €3.50 for a large glass of wine – half the UK price – it’s more common that we sit in the garden with friends and enjoy a decent bottle from the supermarket for between €2 and €5.’

Peter and Karen hope to enjoy many more years in their new Portuguese home. With it being reported this week that southern Europeans will become the longest living people in the world, they’ve settled in the right place.

‘We love pottering in the garden, heading to the beach, especially the long sandy sweep of Praia de Gale, or walking around the marina at Vilamoura. But we do miss our friends and family in the UK,’ says Karen.

The couple have two daughters and six grandchildren, the oldest of whom is 24. ‘They do visit and it’s a wonderful big garden where we can entertain and they love the pool,’ she says. ‘Our day-to-day life is good here, it’s a much better way of living than we’d have had back home.’

All you need to know about tax

Retirees should start planning early for a move. The Portuguese tax year runs from January 1 to December 31. For new arrivals, Portugal has introduced a split year for residency purposes.

Income derived from government pensions – nurses, teachers, firemen etc – will continue to be taxed in the UK and then the Double Taxation Agreement (DTA) is applied in Portugal so you are not taxed twice. State and private pensions will be taxed in Portugal.

For 15 years the NHR (Non-Habitual Residency) regime was an extra draw for wealthy retirees because it taxed pension income at a flat rate of 20 per cent for a 10-year period.

Now the beneficial rate has been removed, pensions are taxed at a progressive income tax rate that starts at 13.25 per cent on the first €7,703 of income and rises through to a top rate of 48 per cent on income of €82,000 or more.

Inheritance and gifts tax have been abolished in Portugal, but a stamp duty of 10 per cent applies on the transfer of assets (houses, cars etc) located in Portugal upon death

Inheritance and gifts tax have been abolished in Portugal, but a stamp duty of 10 per cent applies on the transfer of assets (houses, cars etc) located in Portugal upon death

An additional solidarity tax is payable by those on higher incomes – current rates are 2.5 per cent on income between €82,000 and €250,000, and 5 per cent above that.

Investment income (interest, dividends, rental income, capital gains) is taxed at a flat rate of 28 per cent, or can be added to the taxpayer’s other income and taxed at the scale rates. 

‘Married couples resident in Portugal can be taxable on the aggregate income of husband, wife and dependent children or can choose to be taxed individually,’ says Jason Porter, of Blevins Franks, a cross-border wealth advisory service.

Mr Porter says retirees should also bear in mind that UK tax-efficient investments such as Isas and Premium Bond winnings are likely to be taxed in Portugal.

Gains on the sale of real estate – except the main home – are taxable if the property was acquired since 1989. For Portuguese residents, only 50 per cent of the gain is taxable.

Beware that if you sell your UK home after you become tax resident in Portugal, you could be subject to capital gains tax there. If someone with €30,000 income has a capital gain of £500,000 on their UK home, the tax due could be €118,556 (£100,000), according to a calculation by Blevins Franks.

Inheritance and gifts tax have been abolished in Portugal, but a stamp duty of 10 per cent applies on the transfer of assets – houses, cars etc – located in Portugal upon death.

Brexit visa rules for Britons

Post-Brexit rules mean the only way you can legally stay in Portugal for more than 90 out of 180 days is to get a D7 visa, unless you can trace some Irish or other EU family roots to apply for an EU passport, or are married to someone with one – in which case you can apply for residency as their dependent.

The D7 is the obvious route, and Peter and Karen say it is fairly easy to obtain. You are required to show you will not be a financial burden by proving passive sources of income of at least €9,840 (£8,328) per year for a single person, or €14,760 (£12,492) for a married couple.

The visa is applied for in the UK from the Portuguese Consulates in London or Manchester.

Post-Brexit rules mean the only way you can legally stay in Portugal for more than 90 out of 180 days is to get a D7 visa

Post-Brexit rules mean the only way you can legally stay in Portugal for more than 90 out of 180 days is to get a D7 visa

Income sources are assessed on a case-by-case basis, says Paula Meireles, a lawyer in the Algarve. ‘The consulates will accept savings, but their preference is for pensions or other sources on ongoing income.’

When arriving in Portugal you must have travel health insurance but then register on the SNS – the equivalent of the NHS. You do not need private cover once you are established.

The visa application costs around €200, plus legal/translation fees. A D7 residence permit is granted for two years, then can be renewed for three years.

After five years of legal residency, you can apply for permanent residency or citizenship.

The D7 assumes those relocating will become tax resident in Portugal, which automatically happens if you spend more than 183 days in the country.

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