How to take your UK pension pot overseas-and not be hit by a big tax bill
Once the thrill of deciding to retire overseas has subsided, you normally start to think of all the things you need to do before you go. Picking the right removal firm, a lawyer to help you buy a new home are a couple, but the tax & financial implications of your move – particularly for those drawing a pension – should be at the very top of your checklist.
With a potential saving of 45% taxation on your pension lump sum – following the new pension freedoms introduced by the Chancellor at the 2014 Budget – it is paramount you seek financial advice before moving overseas. Much has been written about these new rules, but very little has been contributed on what the impact is in using the pension freedoms after you have retired abroad.
If you become a tax resident overseas, then taking a lump sum from your pension scheme will normally be taxable overseas, and not in the UK. Because of this the tax treatment of the lump sum can vary considerably. Some countries have favourable legislation around the receipt of a pension or specifically a pension lump sum, whilst others offer individual, favourable tax regimes for new arrivals.
The UK has Double Tax Treaties with most other European countries. They are designed to allocate the taxing rights to a particular country, or allow the offset of taxes paid in one country against another. Most treaties give the taxing rights on private and company pension schemes to the country of tax residence, whilst a UK Government scheme is normally taxable in the UK.
The retiree could therefore choose to move to a jurisdiction that is not only attractive from a lifestyle perspective, but is also favourable in terms of the tax on their pension.
France taxes pension lump sums at 7.5%, with social charges of 7.4% (which can be eliminated by completing a form S1). To benefit from the best tax treatment, you should delay taking any benefit from your pension until you are French resident, and then take the pension as a single lump sum payment. This should result in an overall tax rate of 7.5% on your whole pension, with no UK tax payable because you are not a UK resident.
Portugal has an attractive set of rules for new residents, known as the Non-Habitual
Resident (NHR) regime. For the first 10 years of tax residence, no tax is due in Portugal on foreign income for anyone who has not been a Portuguese tax resident in the previous five tax years. You will need to register with the Portuguese tax authorities as NHR. You will then be tax exempt on foreign source income including interest, dividends, employment income, rental, capital gains, and pensions. A UK pension scheme would qualify, and if encashed during the 10-year period, then no tax would be payable.
Other attractive regimes apply in Cyprus, and Malta (where even UK government schemes can be taxed at a reduced rate).
In Cyprus, UK pension income received by a resident of Cyprus can be taxed in one of two ways at the taxpayer’s option: at a flat rate of 5% on the excess over €3,420, or at their normal scale rates. The decision is made annually, when the tax return is completed, so you can change your mind from one year to next. The UK/Cyprus Double Tax Treaty says all forms of pensions arising in the UK, including UK government pensions, are taxable only in Cyprus and not the UK. In addition, Cyprus has further reliefs around what is known as “exempt income“ which means regular annual pension income should not suffer tax at a greater rate than 5%, whilst pension lump sums should be entirely free of taxation.
The Malta Retirement Programme (MRP) is designed to encourage retirees to take up residence in Malta. By using the MRP, you can benefit from a tax rate of 15% on any income arising outside Malta. To qualify, you will need to either purchase or rent a property inMalta (€275,000 value or €9,600 p.a. rental), and be receiving your pension in Malta.
Applicants must reside in Malta for at least 90 days a year, on average over five years. HMRC will require proof your UK pension is being taxed in Malta before agreeing to pay it gross.
Individuals in the UK looking at retiring to sunnier European climes need to be aware of these potential tax savings before deciding to take their pension benefits. It could make a big difference to the quality of your retirement, so be sure to start thinking about your financial planning long before you board that plane.