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Why Retiring Abroad May Save You Thousands
The new pension legislation may open up greater opportunities to retire abroad, move your pension and minimise your tax burden.
If, having worked hard and built up a nest egg, you dream of retiring abroad to a climate with year-round sunshine then, subject to careful planning, there is now an opportunity to move abroad, take your hard-earned savings with you and potentially escape some of the UK taxes that would otherwise apply.
To benefit from these rules you would need to meet strict residential criteria both in the UK and your destination country and it is essential to take advice from a professional taxation specialist with the appropriate experience of the taxation laws of the country to which you intend to move.
Taxation for Ex Pats
How you are taxed on your pension income will depend on where you choose to reside and the type of pension that you have. Public sector pensions for example will almost always remain taxable in the UK (except in Cyprus – see below).
As a result of the “double taxation” treaties that the UK has with most countries you will avoid having to pay tax in both of the jurisdictions. Under these treaties your pension, which includes employer schemes, personal pensions and your state pension, are taxable only in the country in which you live.
There are some countries where you would pay twice (Brazil for example).
There are a few key points to be aware of if you decide to move to a country that has a double tax treaty with the UK.
If you reside in the United States for example you will be taxed on the 25% lump sum that is tax-free in the UK. Also Australia, New Zealand and Canada will cap your UK state pension to the amount at the point that you migrated there. As a result the value of your state pension will fall in real terms because of the effects of inflation.
Breaking Your UK Tax Status
Breaking your UK tax status is harder than it used to be and you must have genuinely settled in the other country. Even 30 days spent in the UK in a year can make you a UK resident for tax purposes so you will need to manage your visits back to the UK very carefully to avoid the risk of falling back into the UK tax bracket.
A Place in the Sun
Assuming that you successfully break with the UK and settle abroad here are some of the more favourable places in Europe from a tax perspective.
Portugal – No tax on Pension (for 10 years)
The UK and Portugal have a double tax treaty but more importantly Portugal has legislation that allows new arrivals who become tax resident to take all foreign sources of income tax free for the first 10 years. Provided that you have registered as a non-habitual resident with the Portuguese tax authorities you will pay absolutely no tax whatsoever on your pension for the first 10 years whether you take it as one lump sum or as a regular income. (This is available to anyone who has not been a resident for tax purposes for the previous five years).
After 10 years you will be taxed at Portugal’s marginal rates.
Cyprus – 5% tax on Pension
Cyprus is the only country where UK public sector pensions are taxed locally which makes it particularly attractive for retiring public sector workers
British residents in Cyprus for tax purposes choose each year whether their UK pension income is to be taxed at a flat rate of 5pc (above €3,420 per year) or at the local marginal rates, which are higher. Pension lump sums are entirely free of tax.
France – 7.5% tax on Lump Sums
Although as a tax resident in France any regular pension payments are taxable at the normal marginal rates (minus an annual deduction of up to €3,660 per household) lump sums from pensions are not taxed at marginal rates but instead, they are subject to 7.5pc income tax, no matter how big the withdrawal is.
So if you’re keen to take your whole pension pot in one go, France might be the ideal place for you.
France also charges a 7.4pc social tax, although expats are usually exempt from this so long as you fill in the relevant paperwork.
Spain – between 5% and 52% tax
Probably the most popular country for British retirees but not particularly attractive from a tax perspective. There are a lot of grey areas in Spanish tax law and regional variations also make it difficult to make retirement financial plans with any certainty.
The best-case scenario, you could take an annuity and pay less than 5pc tax on the income. But in the worst-case scenario, your annuity could be taxed as savings income at a rate of 21pc, 25pc or 27pc, depending on your income. Other pension income is considered general income and taxed as such at between 24.75pc and 52pc.
Additionally, the 25pc tax-free lump sum is taxable in Spain once you are a Spanish tax resident — so it is wise to take it before you leave British shores.
The best approach is to get individual and specialist tax advice before taking any definite steps and well before retirement.
A Good Time to Invest Abroad?
Ultra-low mortgage rates, cheap property prices and a weak euro are attracting buyers particularly in France and Spain.
In France very long-term fixed deals are the norm and a 20-year fix term at 2.55% is now available (down from 3.5% a year ago). To qualify for these rates buyers need at least a 15pc deposit. In Spain rates are around 2.95% with a 20% deposit as the norm.
At the same time, the pound has soared against the euro over the past 12 months and at the time of writing is worth €1.38 (up from €1.22 a year earlier). This effectively means that the price of a €150,000 house in Eurozone has fallen from £123,300 to £109,000.
Average house prices in France have been falling by 1pc-2pc annually over the past few years and could drop by a further 3pc this year. An oversupply of property in some areas means prices are staying low but the recently launched programme of money printing (or “QE”) by Europe’s central bank may push house prices up over the medium term, potentially making now a good time to invest.