Covid vaccine uptake levels in both the UK and EU have reached high enough levels for British retirees to resume their plans to spend their later life in Europe.
And with post-Brexit immigration requirements becoming clearer, expat advice firm Blevins Franks expects an “unprecedented demand” from Brits looking for homes in warmer European countries.
But as most people will be relying on their UK pension or pensions for their income in retirement, how are these going to be taxed in the bloc?
They may rely on company, private or government schemes or even a mix of the three, so it is important to understand how the EU member state of choice will tax the UK scheme, said Jason Porter, director at Blevins Franks.
This is especially relevant because the European pension industry is usually deemed “less sophisticated” than the British one, with fewer private pension products available, such as Sipps, and without the degree of flexibility in investment options at retirement, including pension freedoms.
Porter said: “When it comes to our favourite destinations like France, Spain and Portugal, they all treat the different kinds of UK pension schemes as pensions under their legislation. It is then important to understand what this means in terms of taxation.
“Most countries have some form of exempt amount or personal allowance, as well as scale rates of taxation like the UK. But where will the pension be taxed – the UK or where the expat Brit is now living?”
Tax treaties
He continued: “The UK has more double tax treaties than any other nation, including with all the EU 27 member states. The aim of a tax treaty is to establish where a source of income or gains is taxable – in the jurisdiction where it originates or where the recipient resides, if this is different.
“If both states reserve the right to tax, then a treaty will allow the tax payable in one state to be set off against the tax liability in the other, preventing the possibility of ‘double taxation’.”
Nearly all tax treaties follow the same template when it comes to pensions, Porter explained. So, if there is a pension scheme – whether company, private or state – this will be taxed in the country where the member is a long-term resident, not where the policy is written or registered.
But things are different for government pensions – for instance those of teachers or members of armed forces – because these will almost always be taxed in the country where they are located – in this case the UK – not where the retiree lives.
This means that company, private and state pensions will be taxed in the EU member state, besides the government one.
Pension freedoms
Porter also highlighted issues when Brits go into drawdown.
This is because EU countries do not have specific exclusion in their legislation for initial lump sums – up to 25% of the whole pot in the UK. As a result, Blevins Franks suggests taking the lump sum, if the retiree wishes to, before relocating to the EU member state.
If not, they could be caught in the country’s domestic legislation around lump sums, since the treaty with the UK gives it taxing rights when they become residents. For instance, in France the tax rate on a lump sum is 7.5% for Brits of UK state pension age. In Portugal, this rises to 10% for the first 10 years of residence, while Cyprus has a rate of 5%, or even zero in some circumstances.
But Blevins Franks warned that double taxation treaties could work against the British retiree in certain cases.
For instance, UK pension plans have generally been exempt from Spanish wealth tax, but now that the UK has become a ‘third country’ as it is not part of the EU nor the EEA, they may no longer qualify for the exclusion.
A ruling from the Spanish Directorate-General for Tax in 2019 stated that “pension plans established in non-EU member states may not benefit from the wealth tax exemption”.
This means that, in order to get the “best of both worlds”, policyholders should time their cash withdrawals between pre and post relocation period, Blevins Franks said.
