Research the pros and cons of each option, including the tax implications – retiring in Portugal involves navigating two different tax regimes and how they interact.
How UK pensions are taxed in Portugal
Pension income arising from UK government service is not taxed in Portugal and remains fully taxable in the UK.
Your UK State Pension is taxable only in Portugal, at the scale rates of personal income tax.
Income tax starts at 12.5% for income up to €8,342 and rises progressively to 48% for income over €86,634. Income over €80,000 is subject to an additional 2.5% solidarity tax, increasing to 5% for income exceeding €250,000.
Likewise, occupations pensions are generally liable to the Portuguese income tax rates.
Things get more complicated with personal pensions, as it depends on how the contributions were made. In Portugal, for income to be considered a pension, there must be an employer contribution.
Personal contributions are taxed differently than employer contributions. The capital element (the contribution) is not taxed and should be returned tax free. The growth element is treated as investment income, so you can opt for the fixed 28% rate.
Personal pensions without employer’s contributions can be considered a savings scheme and receive favourable tax treatment. However, most UK nationals have a mix of employer and personal contributions, meaning most UK pension income is likely to be taxed at the Portuguese scale rates.
If you take a pension lump sum after becoming resident in Portugal, it is taxed here in the same way as other pension income – with no tax-free element as there is in the UK.
NHR holders
If you obtained non-habitual residence status before the regime closed, you continue to benefit from beneficial treatment on foreign source pension income until your 10-year term ends.
No Portugal inheritance tax
While pension funds can be subject to a local inheritance tax in some countries (to soon include the UK), this is not a concern in Portugal. The local ‘stamp duty’ only applies to certain assets located here, the rate is just 10% and spouses and descendants and ascendants are exempt.
Your other retirement savings
Investment income is taxed at a flat rate of 28% in Portugal. You can alternatively opt for the scale rates of income tax.
Life assurance contracts, where you hold your choice of investments within its ‘wrapper’, can provide significant tax advantages in Portugal. Some British expatriates opt to cash in their pension to reinvest the proceeds in these arrangements, but 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. In the right circumstances, it is possible to access the funds with preferential rates between 7% and 12%.
UK tax considerations
UK government service pension income above the personal allowance remains taxed in the UK at the standard income tax rates.
Individuals with higher-value pension funds may be affected by the UK’s Lump Sum Allowance, Lump Sum and Death Benefit Allowance and Overseas Transfer Allowance. The tax implications will depend on personal circumstances and residency status.
Your pension funds will form part of your estate for UK inheritance tax purposes from April 2027 – and UK assets remain liable to IHT regardless of how long you live overseas. This will have a significant impact on your heirs, especially if you retain other UK assets.
If you die over age 75 and your residual pension funds pass to UK resident beneficiaries, they will pay income tax up to 45% – making a potential combined tax up to 67%.
It is still possible to transfer your pension funds into a Qualifying Recognised Overseas Pensions Scheme (QROPS), but you will suffer the UK’s 25% Overseas Transfer Charge. This may be price worth paying for some, when weighed against the amount of tax it could save your beneficiaries.
Reviewing your pension arrangements
Pensions are not always set in stone. Keep up to date on tax and other relevant reforms, and 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.
British expatriates often take pension decisions based on options provided by UK pension companies who are oblivious to their needs and the tax implications in Portugal. Take personalised advice from a specialist adviser who can provide integrated advice covering pensions, investing, and cross-border tax and estate planning in both countries.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
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.
Read Adrian Hook’s last month’s article: Strategic financial planning for 2026 and beyond
