In theory from April the 6th a UK pension can be taken out in its entirety. There will no longer be a requirement for someone with saved pension wealth to buy an annuity. For a resident in the UK it will mean 25% of their pension can be taken tax-free and the rest will be taxed at the individual’s marginal rate. However, if you move abroad you may be able to take the whole pension tax-free.
There are plenty of caveats and warnings to this fact however, and we detail these below! But if you want to move to a country like Cyprus or Portugal you can theoretically take your entire pension free of taxation…and if you move to a country like France or Malta you can enjoy a real tax reduction compared to what you’d pay if you remained in Blighty.
If all this sounds like it’s too good to be true it’s not – but be warned there are plenty of hurdles to jump through and issues to be aware of. Expats may be able to take their entire UK pension tax-free, but they may not want to…here’s why and how it works: –
From April 6th 2015 anyone with a British pension can in theory take the whole lot out in one go…or take out multiple lump sums whenever required. The first 25% of the final pot is tax-free.
According to recent research many pre-retirees are putting their pension plans on hold ahead of April the 6th because they want to benefit to the max from the new changes.
As we reported earlier this year: “Instead of buying an annuity and pegging their future retirement to a fixed investment path, soon-to-retire pension account holders are putting off making any decisions until after April’s new changes come in to effect. “
However, the first point to be aware of is the fact that the majority of pension scheme managers aren’t ready for April the 6th’s changes, with some reporting that the way their schemes are structured and managed means they will never allow for an account holder to take their entire pension out as a lump sum.
The next point to think about is this – yes, some countries offer the ability to enjoy your entire pension tax-free…Cyprus and Malta to name but 2. But to benefit you have to make sure you quality.
You need to make sure you have established correct residency and no longer have any tax residency commitments in the UK. In addition, if you’re going to take your entire pension as a lump sum, check to make sure your scheme operator will allow that.
Next, ensure that your withdrawal won’t trigger an emergency tax code and subsequent tax grab in Britain. Whilst you may get the money back eventually, you’ll lose out on the investment of that money in the meantime, and when you come to move it abroad exchange rates may be against you.
And a word about that – be aware of exchange rates when taking your pension and what that will mean if you move it in to another currency, (the euro for example), and what about any fees or charges you may incur at the time of transfer. These could erode your lump sum significantly.
Finally on this point ensure your understanding of the rules in your new nation is correct, and that you will qualify for their beneficial tax treatment of your money.
According to The Telegraph: “The rules in Cyprus allow for UK pension lump sums to be entirely free of taxation, and any regular annual pension income should not suffer a tax rate of more than 5%.”
And in Portugal British retirees: “could benefit from the Non-Habitually Resident regime, which applies if you have not been resident for tax in Portugal within the previous five years. In short, this gives you tax exemption on foreign income sources – including interest, dividends, employment income, rental capital gains and pensions – for the first 10 years of a residency.”
Elsewhere you could reduce the amount of tax exposure: Malta has a retirement programme available for qualifying expats that effectively reduces the tax rate to 15%. Or for qualifying Brits in France with an S1 form the rate of tax could be as low as 7.1%.
The key in every nation is ensuring you qualify for the benefits on offer. And the key when it comes to your pension is ensuring you have the ability to make a complete lump sum withdrawal tax-free.
Final consideration should be given to the ongoing investment and utilisation of the money withdrawn from the pension. A pension is created to provide an income for life…at least in theory.
And that’s where annuities come in to play – but if you don’t want to buy an annuity, what will you do with your pension to ensure you have enough to live on for the rest of your life?
Expats abroad have little enough protection of their financial position and investment decisions – we, like The Telegraph, would warn anyone considering taking their pension and reinvesting it in anything other than an annuity and anywhere other than the UK to tread incredibly carefully.
Any scheme that looks too good to be true invariably is.