A place in the sun: Retiring overseas requires careful tax planning

Jason Porter explores the tax regimes in Portugal, France, Malta and Cyprus – four of the most advantageous territories for UK ex-pat retirees

People aged 55 and over are now entitled to their pension in the form of a lump sum, to be taxed at marginal rates applying in the tax year it is taken.

While much has been said of the impact of these “freedoms” – from Lamborghinis to buy-to-let investments – very little has been considered about those individuals who choose to move overseas and enjoy an expat lifestyle in retirement.

The basic cross-border rules about pensions (regardless of the form in which they are taken) is that they are taxable in the country where you are resident, not where your pension scheme is located (apart from UK government pensions, which almost always remain taxable in the UK).

New arrivals

However, most people are unaware that several European countries, favoured by UK expats as retirement locations, either have attractive legislation about the receipt of pension lump sums or offer favourable legislation for new arrivals that can be taken advantage of.

Perhaps in part thanks to the weakening euro and the current strength of property prices in the UK against the continent, the percentage of UK retirees seeking advice to move abroad could rise significantly when they become aware of the potential tax savings available.

Some of the most attractive countries in Europe for UK retirees from a pensions perspective are France, Portugal, Cyprus and Malta.

France

There is a long-held perception that French taxes will eat up much of your income and savings.

But from a pensions perspective in France, lump sums received in commutation of pension rights are subject to 7.5% income tax and 7.4% social charges. (You can be exempted from the social charge when you produce the HMRC form S1.)

With a maximum tax rate of 45% in the UK, a rate of 7.5% in France is a significantly more attractive option.

While local French tax inspectors have been known to take differing views on the definition of a pension lump sum, for the avoidance of doubt and to stay within the actual boundaries of the legislation, the payment would need to be a single complete commutation of the fund.

This is particularly attractive if you favoured retiring to France anyway, and might make it worthwhile delaying the receipt of your pension benefits until you have ceased UK residence and become a French resident.

Portugal

Portugal does not have specific tax legislation about pension lump sums, but has the attractive “Non-Habitual Resident” regime for new arrivals into Portugal.

As long as you have not been a Portuguese tax resident in the previous five tax years, these rules will apply for the first ten years of tax residence in Portugal.

Once registered as a Non-Habitual Resident individual, tax exemption applies to foreign sources income (interest, dividends, employment income, rental, capital gains and pensions).

Unlike France, the ten years allows an individual to receive the lump sums over a series of payments rather than a single sum.

This enables the individual to keep the remainder of their pension fund invested and growing in a tax-favoured environment over the period.

Cyprus

In regard to Cyprus, UK pension income received by a resident of Cyprus can be taxed in one of two ways: at a flat rate of 5% on the excess over €3,420, or at normal scale rates.

Under the terms of the UK/Cyprus double tax treaty (DTT), all forms of pension arising in the UK (including UK government pensions, in this instance) are taxable only in Cyprus and not the UK, provided that you are Cypriot tax resident.

This includes items such as retirement gratuity and commutation of pension, which could include pension lump sums.

Cyprus is particularly attractive to those in receipt of UK government pension schemes, as in all other DTTs the UK retains the taxing rights in the UK.

This includes UK government pensions (in this instance) taxable only in Cyprus and not the UK, provided that you are Cypriot tax resident.

In addition, Cyprus has further reliefs about “exempt income”.

Malta

For those looking at Malta, a UK expat residing there could utilise a QROPS (qualifying recognised overseas pension scheme) as their pension vehicle.

As a non-UK and non-Maltese pension fund, this is not subject to the UK-Malta DTT.

As such, any pensions monies would be taxable in Malta only if they are actually remitted into the country.

Even then, Malta has some attractive residency and citizenship packages that can restrict Maltese taxation to a rate of 15%.

Deciding factor?

The tax benefits available in certain countries should not be the deciding factor in establishing where you would like to live in your retirement. But if your favourite location also has an attractive tax system, that can only make your retirement more comfortable.