How to retire to Europe and pay less tax on your pension

When thinking about retiring to Europe, it is worth considering where you will pay the least tax on your pension. Your pension is likely to be your primary source of income in retirement and it pays to be aware of the different tax regimes in place in the most favoured European retirement destinations.

This analysis is by Jason Porter, director of specialist expat financial planning firm Blevins Franks

“Several of the nations favoured by retiring Britons have some interesting pension tax breaks which can be used once you arrive. But on the downside, there are also negative tax consequences you need to be aware of – all depending on where you choose to move to.

“Portugal has a special tax regime for arrivals who have not been resident in Portugal in the previous five years. If you register as a ‘non-habitual resident’, then you will only pay 10% Portuguese income tax on any pension income for the first ten years you are resident. But you must apply for this by 31 March of the year following when you became tax resident.

“This could obviously be used against annuity income or pension drawdown, but many Britons who have moved to Portugal have taken the option of encashing their whole pension fund and only suffer 10% tax (this might have been up to 45% in the UK).

“France, often construed as a high-taxing jurisdiction, is actually quite attractive for retirees. Here, UK nationals of state pension age would suffer similar scale rates of tax as they would in the UK on general pension income, but they have a further three choices of how to tax a single lump sum withdrawal, one of which is a flat 7.5% tax rate (if you were under state pension age, you would also suffer 9.1% social charges). As there is also a 10% allowance, the rate is really 6.75%.

“In Cyprus, Britons have two options, where foreign pension income can be taxed at the normal Cypriot scale tax rates, or benefit from a €3,420 allowance and the excess taxable at only 5%.

“While in Spain, Brexit could result in a change in the way UK pensions are treated for Spanish wealth tax. UK pension plans have generally been exempt from Spanish wealth tax. But now as a ‘third country’ (i.e. outside the EU/EEA), they may no longer qualify for this exclusion.

“While the current wealth tax exemption does not differentiate between Spanish, EU and non-EU pension plans, and as a consequence all should be treated the same, a recent binding ruling from the Directorate-General for Tax (DGT) in Spain states that ‘pension plans established in non-EU member states may not benefit from the [wealth tax] exemption’.

“An option, and something which might help in this instance is transferring a UK pension scheme to a QROP (Qualifying Recognised Overseas Pension) based in the EU, though this would need to occur before you become a Spanish tax resident.

“As a result of new responsibilities placed upon pension scheme trustees, a transfer of this nature is often a drawn-out exercise, so you would need to plan for this well in advance of arriving in Spain.”