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Many people dream of retiring to Spain, France or further afield (such as southeast Asia). Yet the tax implications can be very complex, and it is wise to check the rules thoroughly – both in the UK and in your destination country – before taking the leap. It is also a good idea to check the wider implications for your financial plan. Can you afford to retire overseas, in particular, and what would happen if you needed to repatriate?
In this guide, our team at Elmfield Financial Planning offers some key information to consider on taxes when retiring overseas. We hope this helps you. Please get in touch if you are interested in discussing your own pension(s) and retirement plan with us.
The importance of residency
From the UK government’s perspective, your “residency” status is perhaps the most important thing determining your tax treatment when retiring abroad. If you are deemed “UK resident” by HMRC, then you likely will need to pay tax on your pension income (unless, say, your income falls below your personal allowance; i.e. £12,570).
However, if you are classed as non-UK resident then there is not normally UK tax due on your pension(s). Your new country of residence may tax this income, nonetheless. Here, you must check the relevant rules in your hoped-for destination. One crucial thing to check is whether the UK has a “double taxation” agreement with the country in question. If not, then there is a chance you may be taxed by both countries.
Your tax-free lump sum
A recent story in The Telegraph highlights how residency can affect a UK citizen’s tax liability on pensions. Here, a British couple wants to retire in Spain and the husband wants to take his 25% tax-free pension lump sum when he reaches age 55 (in June 2024). Under current rules, if he is “UK resident” then he could do this, tax-free. However, since they are both presently Spanish residents, Spain would tax this withdrawal – resulting in a tax charge of €64,000 (£58,200).
Here, the couple may wish to consider repatriating to the UK – at least in the tax year leading up to the planned withdrawal. As UK residents, they could then take their tax-free lump sum and go back to Spain. If they did not want to do this, then other options would need to be considered (e.g. not making the pension withdrawal at all, but keeping it invested).
Your State Pension when overseas
It is important to recognise different pension types when discerning how to “take pensions with you” when retiring overseas. Your State Pension is paid by the UK government in British pounds and can, therefore, be accessed in different ways. This can be paid into a UK bank account and you could then make ATM withdrawals, bank transfers and direct debit payments from this whilst overseas. Or, it could be paid into a local bank account.
Both ways involve currency conversion, however, which erodes the value of your State Pension over time. Whilst this may be offset by the lower cost of living in certain countries (e.g. parts of southeast Asia), you also need to consider that the “triple lock” system will not be maintained for expats retiring in many parts of the world. This system ensures that your State Pension income rises each tax year by at least 2.5%. Not having this would mean that this income falls in value, in real terms, over the years you live abroad.
Moving pensions abroad
The other main types of UK pension include your pension “pots” (called defined contribution schemes) and final salary pensions (or defined benefit) which pay an income from a previous employer to you in retirement.
The latter will come from a UK-based pension scheme which cannot be transferred abroad, unless perhaps you worked for a multinational employer who could make arrangements for you. Alternatively, you could transfer your final salary scheme into a pension “pot” scheme in the UK (or perhaps a recognised one overseas), although it is rarely a good idea to do this.
Pension pots can, in certain cases, be transferred overseas so that it is “based” in your new country of residence. Here, your UK pension can only be moved to a QROPS in another state (Qualifying Recognised Overseas Pension Scheme).
Sometimes, there are strong benefits to this option. Perhaps your new country of residence allows you to withdraw a more generous tax-free lump sum. Or, you can receive pension income in local currency and you may have more flexibility over income payments.
However, since the Autumn Statement of 2016, more stringent QROPS rules have been introduced which make it even more important to seek financial advice before transferring a pension overseas. In particular, the 25% overseas transfer charge can make the decision unpalatable for many people. You also need to think about what would happen if you ever needed to repatriate to the UK, and your pension was still based overseas!
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
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