Retire abroad? The country offering tax-free pensions

One European country’s generous tax regime to entice wealthy expats is looking even more attractive thanks to pension freedom.

Many dream of retirement in sunnier climes and with pension freedom the opportunity to take your savings and run is even more tempting.

A reduced tax bill is even more enticing, and one country is going further than just offering lower taxes. In an effort to attract wealthy foreigners to its shores, Portugal is promising they won’t have to pay tax on their non-Portuguese income for a decade.

The offer has been in place in for six years, but Jason Porter from expat advice firm Blevin Franks said the introduction of pension freedom meant this generous tax break was now even more attractive. Under pension freedom, a retiree can take their entire pension out in one go or over a number of years and if they are living in Portugal they could access the whole pot over a 10-year period tax-free.

The ‘non-habitual residence regime’, or NHR for short, makes Portugal the most tax efficient country for retiree expats to live in as long as they have not been resident in Portugal for the past five years.

‘[The Portuguese government] want new arrivals and they want people who have money to come, so they have a special tax arrangement for those who become resident… for the next 10 years you will not pay tax on any non-Portuguese income,’ he said.

Due to the UK’s double taxation agreement with Portugal, you do not pay UK tax on income taken from a UK pension if you live in the country – the UK government leaves it up to the country in which you live to tax you.

Hop on the plane to Spain?

The latest government data shows there are around 39,000 UK expats living in Portugal but it is nowhere near as popular as its neighbour Spain, where an estimated one million Brits live.

Porter said while Spain was still a popular destination for British retirees, those thinking of whiling away their golden years on the Costa del Sol should be wary of the punitive wealth tax that has been implemented by the government.

The Spanish government now levies a 2.5% tax on worldwide assets meaning those who still have a home and assets in the UK could be hit hard.

Porter said there are two forms the Spanish authorities make expats fill in, one on which you declare your Spanish assets worth over €50,000 (£35,000) and another on which worldwide assets need to be declared. However, the Spanish taxman has found that often the forms do not match up and is currently investigating 36,000 cases.

Porter said he saw a number of clients who were in a ‘horrendous position’ because they had not declared their finances wholly.

Flee to France?

For those whose idea of an ideal retirement is spent holed up in the French countryside, they should also be wary of the wealth taxes levied by the French government. This is the French equivalent of the mansion tax but is levied on everything from jewellery and cash, furniture and land, as well as your home.

The charge starts at 0.5% for those with wealth between €800,000 and €1.3 million, rising to 1.5% the wealthier you are.

This wealth tax is not the only concern for Britons living in France, said Porter, who points to ‘social charges’ levied on a wide variety of income sources, such as income from investments, rental income and capital gains, with rates as high as 17%.

One consolation of living in France, and Spain, is that families, not individuals, are taxed

‘If, for example, the husband works his whole life and builds up a pension of £70,000 or £80,000 a year, he would be taxed 40% in the UK but in France or Spain you have a joint tax system which means [a husband and wife can share the allowance and tax burden] and so you are not paying the same [high] rate,’ he said.

Pensioner exodus expected

Porter is expecting the number of people leaving the UK to retire abroad to increase over coming months, mostly due to the boost they have been given by pension freedom.

He said an exodus had been expected 18 months ago but ‘a few factors in Europe made people uncertain’, including the state of European economies, banking problems and increased taxes.

‘There was a psychological barrier but from the start of the year it has all come together positively for people going [abroad],’ he said.

‘The [euro] has dropped against sterling so your money is worth 25% more. Property has dropped… in Spain it is down 65% and bumbling along the bottom and is about to go up in about six months.

‘Then you throw in pension freedom and it becomes a no-brainer. If you are thinking of doing it, do it now.’