When embarking on your retirement journey, it’s important to carefully review all the options for your pensions.
Take the time to weigh the pros and cons of each option to establish which best suits your circumstances, objectives and risk tolerance. This includes understanding the tax implications, and retiring in Portugal involves navigating two different tax regimes.
Once you become tax resident in Portugal, most UK pension income (including lump sums) becomes taxable here and is no longer liable for UK tax. The one exception is government service pensions.
Government service pensions
Pension income arising from UK government service is not taxed in Portugal at all. The income remains fully taxable in the UK, under the usual income tax rates and personal allowance.
Government service pensions are civil service or local authority pensions. They may also (but not always) be teachers, police and fire brigade pensions. NHS pensions don’t necessarily count as government service.
UK State Pension
Once you are tax resident in Portugal, your UK State Pension is taxable only in Portugal, at the scale rates of personal income tax from 13.5% for income up to €7,703 to 48% for income over €81,199. You benefit from a deduction of up to €4,104.
Occupational pensions
Likewise, occupational pensions are generally taxed as general income in Portugal.
In some cases, where the pension fund includes employee/personal contributions, a more beneficial tax treatment could potentially apply to that element. It is not straightforward so seek personal advice.
Personal pensions
The treatment of personal pensions depends on how you made your contributions. Portugal has a traditional view of what constitutes a pension. In the UK, retirement annuity contracts, SIPP, SSAS, defined benefit or defined contribution occupational schemes are all treated as pensions for tax purposes. In Portugal, in order to be taxed as a pension, there must be an employer contribution (since pension income is effectively deferred employment income).
Personal contributions are taxed differently from employer contributions:
- The capital element (the contribution) is not taxed and should be returned tax free.
- The growth element is treated as investment income, and you can opt for the fixed 28% rate.
Personal pensions without employer’s contributions can be considered a savings scheme and receive the favourable tax treatment applied to life assurance policies.
However, most UK nationals have a mix of employer and personal contributions and cannot distinguish between the elements. It is, therefore, highly likely that all their UK pension income will be taxed at the scale rates.
Pension lump sums
The UK rules allow you to take a 25% ‘pension commencement lump sum’ tax free. But if you take this lump sum after becoming resident in Portugal, it is taxed here in the same way as other pension income – there is no tax-free element.
Pension treatment under non-habitual residence (NHR)
If you registered as a non-habitual resident before March 31 , 2020, foreign source pension income is generally tax free.
If you registered from April 2020 until the scheme closed to new applicants, your foreign pension income is generally taxed at 10%.
UK government service pensions always remain taxable in the UK.
Your other retirement savings
Investment income is taxed at a flat rate of 28%. This covers interest and income from capital investments such as shares, securities and bonds. You can opt for the scale rates of income tax if that works out cheaper.
Life assurance contracts, where you hold your choice of investments within its ‘wrapper’, can provide significant tax advantages in Portugal. Take wealth management advice to establish if these arrangements would be suitable for your objectives and circumstances, and how you could potentially benefit from them. Some British expatriates opt to cash in their pension to reinvest the proceeds in these arrangements, but first carefully evaluate if this is a suitable option for you.
There can also be attractive tax options for residents in a position to encash their pension, making it comparable to NHR benefits.
Reviewing your pension arrangements
If you are a resident of Portugal and have a UK pension, review your pension arrangements and establish what is best for your current and future circumstances.
Pensions are not always set in stone. Like you, they might benefit from moving abroad and you need to regularly review your objectives. That could mean changing your investment profile, reassessing your risk tolerance, or developing an alternative strategy that embraces your overall financial situation.
Pension decisions are often taken in isolation based on options provided by UK pension companies who don’t understand your needs and the Portuguese tax. Take personalised advice from a local adviser who can provide integrated advice covering pensions, investing, and cross-border tax and estate planning for both countries.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
By Adrian Hook
|| features@algarveresident.com
Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).
www.blevinsfranks.com
