Taking a grown-up gap year
Retirement has become an increasingly distant prospect for the under-50s. Governments are pushing pension age later and later, while companies have become less generous in the pension benefits they offer. The ‘grown-up gap year’ has emerged as an opportunity to travel, volunteer or retrain at a time when people are still young enough to enjoy it.
A whole industry has emerged catering to this growing market. From ‘volunteering projects for the mature traveller’ to ‘gap years for grown-ups’, there is an option for every preference and budget. However, it can take a significant commitment from your finances and – perhaps more importantly – have implications for your career. How can you ensure that a gap year doesn’t inflict a permanent gap in your wealth?
Check your company’s policies
If you have a reasonably lengthy tenure with your employer, it may be possible to obtain permission for a sabbatical period. This isn’t usually paid, but it does offer the security of having a job to return to. In practice, many people ultimately decide not to return to their previous job, but having the option can’t hurt. Even if your company doesn’t offer formal sabbatical breaks, it may be willing to offer a period of unpaid leave, particularly if you intend to follow a course or improve your skills while you are away.
There may also be schemes linked to your profession. This is always the case for in-demand sectors such as medical personnel, but there are also schemes for the accountancy profession, for example, which send accountants to work with foreign charities. These secondments can open up a new opportunity in your life, without the risk of leaving behind everything you have worked for up to now.
Consider your pension
This has long been a problem for women who find that even relatively short periods out of the workplace spent caring for children can put a sizeable hole in their pension provision. If you do not make contributions when not working, you miss out not only on the contributions themselves, but on their compounding effect. Failing to make, for instance, €10,000 in contributions could result in a long-term loss of between €40,000 and €45,000, assuming a growth rate of 5%, in your final pool of pension assets 30 years later.
For those who can afford it, it is worth keeping up pension contributions through a career break.
For those who can afford it, it is worth keeping up pension contributions through a career break. If you have no earnings, this may influence the amount of tax relief you can claim, but even relatively small contributions can make a significant difference in the longer term.
Letting out your home
Most people embarking on an adult gap year will consider renting out their home. This can help fund whatever activities you are planning, and there will often be a significant surplus from the amount you receive in rental income on your obligations in mortgage loan repayments or other expenses. However, you should not assume this will be pure profit: you will also have to pay tax, letting fees and other costs.
In Luxembourg, rental income is taxed at standard progressive income tax rates. The recipient is entitled to deduct expenses including mortgage interest, maintenance and repair costs, and estate agent fees from their taxable income – and if this results in a deficit, it can be deducted from other income for tax purposes.
If you have a mortgage loan, you will need to inform the lender about periods of letting. While most will allow homeowners to retain the same loan for temporary periods of letting, others may insist on switching to a buy-to-let mortgage loan, on which interest rates are usually higher, if the arrangement continues for more than a limited period.
Those who decided not to rent out their home should make sure their insurance covers periods when the home is unoccupied – which is not automatic.
Those who decided not to rent out their home should make sure their insurance covers periods when the home is unoccupied – which is not automatic.
Changing tax position
If you have been a higher-rate taxpayer, a grown-up gap year may result in you moving temporarily to a lower tax bank. This situation could make it worthwhile to examine your position with regard to capital taxation. Are you in a position to realise significant gains at a time when your tax liability would be lower?
It is also possible that you could be considered a non-resident of Luxembourg or another country where you normally live for a period of time. This can also create tax planning opportunities that can be explored with the help of your financial adviser.
Naturally, you hope you won’t get eaten by an alligator while cruising down the Amazon, or encounter a venomous spider in the Australian outback – but these possibilities, however remote, need to be taken into account.
It is always advisable to make a will, but especially so if you are globetrotting. The will should make it clear how you plan to divide your estate. It doesn’t need to be complicated – although it needs to take into account Luxembourg’s forced heirship rules – and nor should it be expensive, but it is an important part of any pre-travel checklist.
Medical insurance
If anything is liable to wreck your finances with devastating speed, it’s unexpected medical bills. Being helicoptered out of somewhere remote can cost thousands of euros. At the same time, if you are travelling to less developed countries, you may not want to rely on the local medical provision if you have a serious illness or injury. Travel insurance won’t be cheap, but it is a necessity.
A grown-up gap year can be a wonderful opportunity to develop skills and expand your mind, or simply to see the world while you have the time, energy and resources. Planned well, there is no reason why it should harm your finances, but it’s important to pay attention to the key issues involved in order to launch yourself into what could be a life-changing experience without having to worry about adverse consequences.
The ‘grown-up gap year’ has emerged as an opportunity to travel, volunteer or retrain at a time when people are still young enough to enjoy it.
Mortgage
Personal loan
Savings