Where's best to have your pension income taxed?

Where's best to have your pension income taxed?

You might be rushing to draw down your pension lump sum to spend on your new life abroad but here are some things to think about before you take the plunge...

Q: What were the main pension rule changes last year?

A: A fundamental change to the UK pension regime took place on 6 April 2015, when the government allowed you to take some or all of your pension scheme capital in the form of a lump sum.

The amount, over and above the tax-free 25 per cent, will be taxed as income in the UK tax year it is taken. It is added to other income of the year, and taxed through the rate bands, from 20 per cent, up to 45 per cent.

Q: But, if I am thinking or retiring abroad at a similar time to when I am going to take my pension, what impact will this have? Where will I have to pay tax on any pension or lump sum?

A: The UK has a network of Double Tax Treaties with other countries, which are designed to limit the potential for double taxation on the same source of income.

Where the pension is a company scheme, SIPP, QROP, or State Pension, this is taxable in the country where the individual is resident, and not where the pension scheme is located. UK government pension schemes (eg. teachers, firemen, etc.), always remain taxable in the UK, with the exception of Cyprus.

Q: Which countries might be attractive in terms of how they tax pension lump sums?

A: Interestingly, many of the most popular countries for UK expatriates are also the more attractive for pension tax legislation, particularly in respect of lump sums.


Portugal has the Non-Habitual Resident (NHR) regime, which any new arrivals can apply for and obtain. This allows preferential tax treatment in the first 10 years of residence, during which you could entirely encash you pension fund at zero taxation.


France taxes pensions at normal scale tax rates, but only taxes a pension lump sum at 7.5 per cent. There is an additional Social Charge of 7.4 per cent, but this is eliminated if you get a form S1 from the UK NI authorities.


UK pension income received by a resident of Cyprus is taxed at a flat rate of 5 per cent, or at their normal scale rates, at the taxpayer's option. If the pension is taken as a lump sum, this is a pension commutation, converting it to "exempt income" no longer taxable in Cyprus.


Malta has a different tax regime for people who live in Malta, but do not originate there. Maltese income is taxable normally, but non-Maltese income is only taxable if remitted to Malta.

The UK-Malta Double Tax Treaty says a UK pension will remain taxable in the UK if it is not remitted and taxed in Malta. But, by utilising a QROP, a UK pension is converted into a non-UK pension, taking it out of these rules. Alternatively, Malta has various residency programmes, potentially minimising taxes to 15 per cent.

Q: So, I really do need to look at how the country I choose taxes my pension before I retire there?

A: Yes you do, but you also need to consider the whole of your financial affairs, as they will need reappraising in light of your move to a new country with a different tax and financial system.

Using UK pension freedoms to generate a capital sum to go towards buying a home overseas, means you may need to consider an alternative retirement fund to maintain your lifestyle. Alternatively, if you intended to live off your pension fund, then cashing it in means you will need to invest these funds to draw upon over the long term.


Originally published in the A Place in the Sun magazine - Issue 125