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Does Qrops or transferring your UK Pension overseas work?

By Chris Burke - Topics: Barcelona, pension transfer, Pensions, QROPS, spain, UK Pensions, United Kingdom
This article is published on: 4th March 2019

04.03.19

Those people who have a UK private or company pension and are resident outside of the UK, more often than not have the choice to transfer their pension to a QROPS (Qualifying Recognised Overseas Pension Scheme), that is the process of moving your pension outside of the UK. However, what are the important points to note with this, how does it differ from having your pension in the UK and most importantly, does it actually work effectively?

For just over 10 years you have been able to move your pension outside of the UK. Over that time, I have seen mixed success at doing this, with the companies providing this service changing, fees in essence reducing and the options of managing this growing. What has also changed is the benefit of doing this, alongside the advice you receive. Unfortunately, I have come across many cases where this has not worked well, and the reasons are nearly all the same: bad advice was given by the financial adviser who put their clients is funds/pensions that were overpriced and expensive.

To summarise, the current key potential benefits of Qrops would be the first step to seeing if this could be the right choice for you:

  • Pension potentially outside of future UK law changes
  • Brexit and the impact it would have on being a British person living in Spain
  • Potentially side stepping an expected 25% tax charge for moving pensions after Brexit
  • Currency fluctuation (ability to change your pension to euros when convenient)
  • Portability – the ability to move your pension in the future if needed
  • Potentially reduced tax liability
  • Inheritance – potential reduction of tax to beneficiaries or potentially lower tax on death (depending on your country of residence)
  • Peace of mind
  • Closer personal management of your pension
  • Tax efficient (working alongside a local tax adviser) potentially

And what are the key points that might mean Qrops is not right for you:

  • Returning to live permanently in the UK in the next five years (or maybe longer)
  • Pensions total value under £60,000 (the charges would be, in my opinion, punitive)
  • A company scheme where the benefits outweigh transferring
  • In the near future, wanting to take most of the money from your pension
  • Not having your pension in a Qrops managed well and expensively

From the perspective of access to your money, there is currently not much difference to having a personal pension in the UK or a Qrops. With the rule changes a few years back, you can, in essence, get access to your UK pension from age 55 in the UK and as much as you like, just as in Qrops.

Where Qrops really can help is moving an asset away from the UK and any potential rule changes, which have been regular over the recent years (mainly worse for the person owning a private pension). Couple that with Brexit and a potential 25% tax charge, then having your pension outside the UK will give you peace of mind in knowing exactly what the pensions rules would be for you moving forward. Also, given the fact that if you did ever move back to the UK (statistics show that for a British couple, there is a 75% chance one of you will go back at some point), you can transfer it back with you (there could also be tax benefits of doing this) and with some pension companies no charge.

However, perhaps the most important question is, does it work? The simple answer is yes it can, BUT it has to be set up the right way, with the right company and if you are given the right advice for what your pension is invested in. Basically, it needs to be done for your benefit, not so that the adviser can earn as much commission as possible from your pension.

Whenever I take a new client on, I always ask them if they would like to speak to an existing client to see what their experiences were, which is what I would do when performing my own due diligence.

If you would like to talk through any pensions you have and what your options are, feel free to get in touch and know that you will be given good advice, whether you become a client or not.

G transferred her pension 4 years ago; it has grown significantly over that time. “Chris has always been consultative and there when we need him.”

J transferred his pension 6 years ago. “It has grown well over that time. Whenever I have needed money from my pension Chris has arranged this for me. I would recommend him for sure.”

C transferred her pension 5 years ago. “It has grown steadily in that time (I am a cautious investor) and since then my husband and I have asked Chris to help us with our other investments.”

Creating THE Folder…

By Jeremy Ferguson - Topics: Financial Planning, Marbella, Pensions, spain
This article is published on: 18th February 2019

18.02.19

It was only recently I wrote about the fact we are all living longer as a result of improved lifestyles and medication, and the lovely Spanish lifestyle we are all enjoying.

The point I was making is how it is all very relevant to our finances and how we best manage them. But what if you are the one who tends to manage the family affairs and finances: are you confident that all of the papers and documents you hold are not only all in order, but equally as important, somewhere where they can be found and easily understood in the event of your demise? I am aware of many couples who would not know where all of the important documents relevant to their lives are. It is all down to who normally runs the financials, and that can the husband or the wife.

We all spend time every year making sure the ITV for the car is sorted, house insurance and car insurance policies are up to date, tax returns are filed etc. How about putting some time aside to create ‘ THE Folder’ as I like to call it?

So what is THE Folder?
It is a single file (digital or physical) where you keep all of your important personal and financial information together. It allows easy access to these documents in the event that you are no longer around to help. It is really important to have it in place when one family member takes the lead on the family finances; this includes paying bills, managing accounts and storing documents. Even if that is not the case, it is an important exercise.

So what should be in THE Folder?
All documentation that is relevant to running your household with regards to finances, such as:

  • Birth, marriage and divorce (if applicable!) certificates
  • Bank account details, including online login details
  • E-mail and social media account details and logins
  • Life assurance policies
  • Funeral plan policy
  • Pension documentation and statements
  • Investment documentation and statements
  • Wills
  • House ownership deeds

THE Folder can be very simple, and I always suggest contact details for each of the relevant policies etc. should be clearly marked as well. Also, make sure that when THE Folder is complete, you sit down together and explain all of the information it contains, as it will be as useful as a chocolate tea pot if you don’t both know exactly what is there.

Is it worth the effort?
Well, I think it is worth the effort. At a time of loss it can be stressful enough, without having to try to piece together the deceased’s financial affairs. This can be a really difficult time for family members, even more so if your support network, typically children, is back home in the UK.

final salary pension review

However, preparing THE Folder is much more than just avoiding stress; if you leave behind an administrative nightmare, you could delay access to inheritors’ funds and potentially cost a small fortune in legal fees.

To give you an example of this, the UK Department of Work and Pensions estimates that there is currently more than £400 million sitting in unclaimed pension pots in the UK.

Which is best…..physical or digital?
This comes down to personal preference. It can be done by either creating an electronic file that survivors can access in the event of death, or an actual paper file. An electronic file can be stored on your main computer, in the cloud or on an external hard drive. Make sure everyone knows how to access the computer, cloud or hard drive though!

Alternatively, if you use a physical folder to keep all of the important information together, make sure it is large enough to keep everything together. The good old shoe box has been a long time winner in this department, although a well organised file does make life a lot easier for everyone.

For what it’s worth, I find lots of people prefer paper and are happier with hard copies of everything. I personally prefer digital, which I have shared with some trusted family members. It may even be worth considering asking your legal advisers to hold the folder on your behalf (electronic is much better for this reason), so a simple visit to them if anything happens means they can assist you far more easily with everything.

Typically they will want all of the information it contains anyway, so by saving time when it becomes relevant, the small annual charge they may make for holding the information will normally be offset.

How often should THE Folder be reviewed?
It is sensible to note the date that it was last reviewed, so that anyone using it has an idea of how up-to-date the details are, and then going forward, reviewing the file on an annual basis should be sufficient, or of course, whenever a significant change occurs which you consider materially important.

And finally…
I have already stressed this, be sure to tell someone about it! There is little point going to the effort of creating such a folder if no one knows of its existence or where to find it…..

Retiring & income in retirement

By Derek Winsland - Topics: France, Pensions, QROPS, Retirement, State Pensions After BREXIT, UK Pensions
This article is published on: 8th June 2018

08.06.18

A major part of my role as a Financial Planner involves helping clients move towards retirement and advising those in retirement about the best and most tax-efficient way of generating their income once they stop work.

One question I’m often asked is how much money I should save to enable me to retire comfortably. A good question, it depends on what constitutes a comfortable retirement for that particular person. It’s generally quite a straightforward discussion: how much do you need now, and what will change as you approach retirement (mortgages redeemed, no more school or university fees, travel expenses to and from work for instance). Factor in extra expenses for pursuing hobbies, travelling etc. and we begin to build a picture of what retirement will look like and how long the active retirement period will last for.

In the UK, a Which? survey concluded that, in the UK at least, a couple entering retirement needed £26,000 a year to live comfortably. OK, that’s the UK and not necessarily representative of life here in France, but it is a basis for opening a discussion. The next consideration is to identify what the sources of income are – likely there will be an entitlement to UK state pension, possibly some French state pension and maybe rental income form letting out the old UK home, or Gites in France.

For those people actively thinking about and planning for retirement, it is also likely there will be some private pension provision, perhaps even membership of a final salary pension from time spent working for an old employer. And then there are the savings you’ve set aside for the day when you can put down those work tools, and say “That’s it, I’ve done my bit”.

But what income can I reasonably expect those savings to generate to supplement the other sources of income. The Institute and Faculty of Actuaries have ruminated over this question (well they would, wouldn’t they! I can imagine the topic of conversation going around the dinner table at their annual conference). The conclusion they’ve come to is (not surprisingly) based on the life expectancy of the retiree. Retiring at age 55, they believe you should draw down only 3% of your capital each year to ensure that your money doesn’t run out. This then rises to 3.5% if retiring at age 65. Other financial experts believe the figures could rise to 5% per year for a 65-year-old. This then assumes that your capital is invested to generate returns greater than the rate of inflation.

The options for the individual facing an income shortfall include:

    1. Increasing your savings
    1. Decreasing your retirement income expectation
    1. Delaying retirement
    1. Exploring alternative ways of investing available capital and pensions to obtain growth greater than inflation and certainly better than bank interest

A Financial Planner can draw up a future forecast using established assumptions for inflation, rates of investment return, the most tax efficient way of drawing down or generating income, using either life expectancy tables or any other age after discussing your family mortality history with you. This will give you your ‘number’, the amount of capital you’ll need to live comfortably.

The Office for National Statistics has recently launched an online tool on its website designed to tell you what your life expectancy is. If you’re curious, click here:

Once completed this Financial Plan should be implemented to address any recommendations for re-structuring the existing assets, and thereafter reviewed yearly, updating the investment returns achieved and the impact this has on the capital, checking any changes that need to be made to the assumptions and making any amendments that you want included. Long-lost pension funds will be identified, and the expected benefits brought into the plan, and again, any issues addressed. The move is towards handing the responsibility of retirement over to the retiree, so there is not a better time to consult a fully qualified financial planner.

If you have personal or financial circumstances that you feel may benefit from a financial planning review, please contact me direct on the number below. You can also contact me by email at derek.winsland@spectrum-ifa.com or call our office in Limoux to make an appointment. Alternatively, I conduct a drop-in clinic most Fridays (holidays excepting), when you can pop in to speak to me. Our office telephone number is 04 68 31 14 10.

New QROPS tax charge for 2017 – Will this change after BREXIT?

By Spectrum IFA - Topics: Belgium, BREXIT, France, Italy, Luxembourg, Netherlands, pension transfer, Pensions, Portugal, QROPS, Retirement, spain, Switzerland, United Kingdom
This article is published on: 20th April 2018

20.04.18

In the Spring 2017 Budget, the UK government announced its intention to introduce a new 25% Overseas Transfer Charge (OTC) on QROPS transfers taking place on or after 9th March 2017. The HMRC Guidance indicates that the OTC will not be applied in the following situations:

  • the QROPS is in the European Union (EU) or EEA and the member is also resident in an EU or EEA country (not necessarily the same EU or EEA country);
  • the QROPS and the member is in the same country; or
  • the QROPS is an employer sponsored occupational pension scheme, overseas public service pension scheme or a pension scheme established by an International Organisation (for example, the United Nations, the EU, i.e. not just a multinational company), and the member is an employee of the entity to which the benefits are transferred to its pension scheme.

It is also intended that the above provisions will apply to transfers from one QROPS (or former QROPS) to another, if this is within five full tax years from the date of the original transfer of benefits from the UK pension scheme to the first QROPS arrangement.

Nevertheless, it is clear that taking professional regulated advice is essential. This includes if you have already transferred benefits to a QROPS and you are planning to move to another country of residence.

It is important to explore your options now while you still have the chance as who knows what changes will come with BREXIT. Contact you’re local adviser for a FREE consultation and to discuss your personal options

How Do I Find My Pension?

By Emeka Ajogbe - Topics: Belgium, Pensions, Retirement, UK Pensions
This article is published on: 19th April 2018

19.04.18

I have been asked this question, more than once. Some clients are embarrassed to ask. Others have simply lost sight of their pension for one reason or another and have no idea how to track it (or them) down.

Why am I telling you this? Well, recently the UK Government announced that there is over £400 million of lost pensions sitting with various pension and insurance companies in the UK – left behind by former employees who have either moved abroad, are unaware that they had a pension (it’s more common than you would think), or simply have not kept track of their pension. In fact, figures show that four out of five people will lose track of at least one pension over the course of a lifetime.

How can this happen?
It is surprisingly easy for people to lose track of their pension(s). Firstly, because people frequently move around for work. As the former Minister for Pensions, Baroness Ros Altmann said:

“People have had on average 11 jobs during their working life which can mean they have as many work place pensions to keep track of…”

That’s a lot of paperwork to keep on top of and to be fair, most people will only really think of their pensions when they are close to retirement. Which brings me to the second point.

We can and do lose contact with the companies which administer our pensions. The most common reason for this is that pension and insurance companies have merged, and hence brand names have disappeared. For example, a company called Phoenix Life owns more than 100 old pension funds. Its list includes schemes from Royal & Sun Alliance, Scottish Mutual, Alba Life, Pearl Assurance, Britannia Life and Scottish Provident. This invariably leads to a lot of frustrated people looking for their money. It will perhaps surprise you that neither the Association of British Insurers nor the Financial Conduct Authority have a comprehensive list of which company owns which funds.

OK, how can I track down my pension?
Glad you asked. We can help with that, of course. We would need as much information from you as possible which, depending on the type of pension, would include:

Personal Pension

  • The name and address of the pension scheme (you may find that this has changed)
  • The bank, building society or insurance company that recommended or sold the scheme
  • Policy/NI Number

Work Pension

  • The company you worked for and if they have changed names/address since you left
  • Dates you worked there
  • When you started contributing to the scheme and when you finished
  • Employee/NI number

Obviously, the more information that you can provide, the easier it will be to locate your money. However, we will work with what you’ve got to explore all possible options.

Some companies are more efficient and responsive than others when it comes to handling enquiries on historic pensions, even when the original policy documentation is available. It can take years to locate and recover lost funds. You can fight the battle yourself; or we can pursue on your behalf until we get a satisfactory outcome.

Another reason to review your work pension(s) is that transfer values for defined benefit, or final salary, schemes are at record highs. Depending on the company, valuations are higher than most people anticipate. For example, a pension projected to pay £8,000 per year could have a transfer value of over £285,000, well in excess the average house value in the UK!

I’ve got my pension(s). What next?
Depending on your age and circumstances, transferring an existing pension into a new scheme may be beneficial, including if you have more than one pension. Consolidating existing arrangements removes the need to monitor numerous pensions and, perhaps more importantly, allows you to optimise returns from a single, personalised investment strategy, often with greater flexibility over the timing and amount of payments and in your preferred currency.

Ahead of any potential transfer, the first step is to determine whether a transfer is in your best interests. A responsible adviser will always complete a detailed and objective review of your current position and plans. A transfer may not be appropriate, for a variety of reasons – for example if it means the loss of valuable guaranteed benefits – so it is essential to consult only a suitably authorised, qualified and experienced adviser. A proper assessment will enable you to make an informed decision on whether a transfer is best for you.

If you do proceed with a transfer, as part of the exercise you should also expect ongoing advice on matters such as investment performance and outlook, together with guidance on the suitability of the scheme following, or ahead of, a change in your circumstances.

For help with locating and reviewing your UK pension(s), please contact me either by email emeka.ajogbe@spectrum-ifa.com or phone: +32 494 90 71 72.

Tax in Spain can be a matter of opinion

By John Hayward - Topics: Pensions, Section 32 Buyout, spain, Tax
This article is published on: 17th April 2018

17.04.18

In Spain, there can be a huge difference in what autonomous regions charge for income, capital gains, wealth, and inheritance/succession taxes. Rules generally come from central government in Madrid but how that comes out in the fiscal wash in each region can vary considerably. For the purpose of future articles, my focus will be on the Valencian Community incorporating Castellón, Valencia, and Alicante.

There is also an unwritten rule which seems to be rife. The law of opinion. On a subject that you would think there should be clear instruction from the Spanish tax authorities, there is a lot of ignorance on several tax matters and so the law of opinion kicks in. This is especially true for any products which are based, or have been arranged, outside Spain. With the threat of fines for not declaring assets and paying taxes correctly, it seems at least slightly unjust that there is not clear instruction on how different assets are treated for tax.

As my colleague Chris Burke from Barcelona recently wrote, lump sums from pension funds can have special tax treatment, both in the UK and Spain. However, even though most people and their dog know that there is a 25% tax free lump sum in the UK, not everyone is aware that this lump sum is potentially taxable in Spain. Also, it is not common knowledge that there is a 40% discount on qualifying pension lump sums. It is likely that many people have overpaid taxes due to no or bad advice.

Can you tell the difference between margarine and a Section 32 Buyout?
If you can, you could be leader of the Conservative Party, according to the script of The Last Goon Show of All (Actually the comparison was between margarine and a lump on the head but the qualification would seem equally apt almost 50 years later). It is frightening what little knowledge there is with regard to pension schemes, notably with the advisers who make money for arranging them! A Section 32 Buyout plan is just one of many types of pension scheme which have emerged over the last 30 to 40 years. Few people are familiar with all the different types.

A pension fund is, in many cases, the second largest asset behind a property. People are generally familiar with the property expressions such as “doors”, “windows”, “walls”, “kitchen”, etc. They know where these things need to go and when they need repair and maintenance. When it comes to pensions, it is a different story. In a way, that is great for us because it means people need advice. The problem comes when they leave themselves open to advice which is inaccurate, if not complete garbage.

People need to check the qualifications of an adviser and their firm before exposing themselves to potential problems. I have the Chartered Insurance Institute G60 Pensions qualification. You won´t find too many advisers with this, especially not in Spain. As a company we have a team which is qualified and which keeps up to date with pension rules in the UK and Europe. All enquiries go through them before anything is arranged which should give comfort to those nervous about what will happen to their pension funds.

Taking a Lump Sum from your Pension when Resident in Spain

By Chris Burke - Topics: Barcelona, Pension Lump Sums, Pensions, spain, UK Pensions
This article is published on: 13th April 2018

13.04.18

There are conflicting stories on how much lump sum/one off amount can you take from your pension if resident in Spain and what the tax will be. Indeed, many people with UK pensions believe it is better to take their UK pension lump sum in the UK before (grey line here if they have already moved!) they move to Spain permanently, as they will pay less tax. Firstly, even if you have a UK pension but are resident in Spain, this has to be declared in Spain. Secondly, if you finished contributing before 2007 you actually can receive MORE tax relief in Spain than in the UK (dependent upon the pension you have and how you take it).

To clarify, in the UK you can currently take a 25% tax free amount from all your private pensions and anymore would then be taxable.

If resident in Spain, you have the right to take up to 100% of your personal pensions in one go (100% in capital), to receive part in capital and part through regular payments or to receive the whole amount through regular payments. If you receive an amount in capital (a whole or a part) then you can apply for a tax reduction of 40% of the amount received for any contributions you made prior to 2007. This option can only be applied once, so, if you have more than one pension plan, you have to receive all of them in the same tax year if you want to apply this reduction. To clarify, it is the value the contributions have accumulated to today that is tax exempt, not the amount of actual contributions made back then.

From January 2007 there is no tax exemption, zero. Therefore, any contributions made from this point receive no tax exemption, however if the contribution to the pension runs before and after this date the tax exemption is calculated the same way.

If you take the amount as a regular payment you will have to pay income tax as if you have received any other general taxable income (a salary for example). In both of these cases, the amount that is taxed (with or without the 40%) is subject to the general income tax rate.

Lump Sum Pension Tax in Spain Lump Sum

Total amount of pensions: £150,000
Amount to be taken in lump sum/one off: £50,000
Amount tax exempt in Spain: £20,000
Pension lump sum amount income taxable: £30,000 (added to your annual income tax band)


Now if we look at the UK example we shall see the difference:

Total amount of pensions: £150,000
Amount to be taken in lump sum: £50,000
Amount tax exempt in UK: £37,500
Pension lump sum amount income taxable: £13,000 (added to your annual income tax band)

 

However, in the following scenario the Spain example works more in your favour:

Lump Sum Pension Tax in Spain Lump Sum

Total amount of pensions: £100,000
Amount to be taken in lump sum/one off: £100,000
Amount tax exempt in Spain: £40,000
Pension lump sum amount income taxable: £60,000 (added to your annual income)

 

UK Example

Total amount of pensions: £100,000
Amount to be taken in lump sum/one off: £100,000
Amount tax exempt in Spain: £25,000
Pension lump sum amount income taxable: £75,000 (added to your annual income tax band)

Important points to note here are:
If you cash in your UK pension OVER 25% and are registered in the UK as a non resident, an emergency tax code is likely to be used up to 45% and you will have to claim back what is owed to you. Unless you are able to provide a P45 from the current tax year following withdrawal from employment and/or current pension plan,

or

The pension provider already holds a P45 or up to date cumulative tax code received from HMRC as the result of previous withdrawals from that pension plan, and can apply it.

If you take your UK pension as a 25% lump sum, this should be declared in Spain and would apply to the Spanish rules of 40% being tax exempt and the rest income taxable. You would therefore pay any tax owed in Spain.

Only the FIRST Lump Sum is tax exempt so it’s important to realise that and make sure you plan effectively.

Regular payments from your pension fall under income tax

From 2007 onwards there is NO tax exemption of this kind.

Top Tips For Your Pension Lump Sum/One Off
When taking your lump sum, take it in the year that is most tax efficient for you, such as when you have lower income from other sources.

Moving your pension outside the UK could give you more freedom, more choices and potentially less tax to pay in the long term (depending on your situation).

Source: Silvia Gabarró GM Tax Consultancy Barcelona

Hands off my pension!

By Gareth Horsfall - Topics: Italy, Pensions, QROPS, Retirement, Tax
This article is published on: 27th March 2018

27.03.18

As promised, I thought I would follow up with my last article on the complicated issue of trusts, with a less complicated issue of the tax treatment of pensions / retirement funds in Italy.

The majority of my clients are nearing, or in retirement, and so pensions and retirement plans are very much at the forefront of your minds. For the likes of me, (I am 44 years old this year), I am in the accumulation phase and I need to concentrate on building as much capital as possible for when I get older when I need to convert my earning power into an income for life. There isn’t much to say about the accumulation phase, other than how the actual fund is treated for taxation in Italy, which I will touch on below.

What I aim to achieve in this article is to explain the tax treatment, in Italy, on the income from the various types of overseas pensions / retirement funds which we are mostly familiar with. This information is taken from and I will be expanding on articolo 18 del Modello OCSE which states:

“fatte salve le disposizioni del paragrafo 2 dell’articolo 19, le pensioni e le altre simili remunerazioni pagate ad un residente di uno Stato contraente in relazione ad un passato impiego sono imponibili soltanto in questo Stato”

I will not be going into the more complicated area of taxation of Italian pensions since that is best dealt with by a commercialista. I also want to share some of the various tax stories that I have heard of in the past and clarify the situation.

WHAT IS A PENSION AND WHO OFFRS THEM?
A pension is a type of retirement plan that provides an income in retirement. Not all employers offer pensions. Government organizations usually offer a pension, and some large companies offer them and in the likes of the UK and USA you can have a personal retirement pension / plan. Most people, throughout their working life, will also be making National Insurance / Social securitry payments which go towards a national state pension as well.

WHAT IS THE ITALIAN TAX TREATMENT OF EACH?

The state pension / social security:
I have sometimes been asked if the state pension or social security is non-taxable because it is covered under some kind of double taxation treaty. I remember this being a common question some years ago and wondered if a rumour was going around. Thankfully it hasn’t raised its heads for a while but for the record the state pension /social security of another country, payable to you as a resident in Italy, is taxable in Italy at your highest rate of income tax. If you have other sources of income in retirement then they are added together and the banded rates of income tax applied.

Remember that the income types which are subject to IRPEF (Italian income tax) are retirement income, employment income and rental income.

A QUICK REMINDER OF ITALIAN INCOME TAX RATES
(IRPEF – Imposte sul reddito delle persone fisiche)

   0 – €15000   23%
   €15000 – €28000   27% (€3450 + 27% on the part over €15000)
   €28000 – 55000   38% (€6960 + 38% on the part over €28000)
   €55000 – 75000   41% (€17220 + 41% on the part over €55000)
   Over €75000   43% (€25420 + 43% on the over €75000)

The Italian pension credit…….it’s not an allowance!
This is another one of those mis-understood Italian tax benefits. (It would make sense that it is misunderstood because ‘Italian’ and ‘tax benefits’ are not words that often go hand in hand). However, if you are a pensioner (that means a pensioner at state retirement age and not someone who has retired early), then you might be eligible for a tax credit on pension income up to €8000 per annum. At this point I would like to say that this is NOT a tax allowance. It is not the first €8000 of pension income which is non taxable for everyone. That would be nice and has been proposed by some of the possible incoming political parties, but for the moment, not everyone is eligible to receive it.

It means that where you have €8000pa retirement income and below, that you could be eligible for a full tax credit on that amount. i.e the tax is calculated at 23% and then that is given back in your tax return.

The catch is that if you have more than €8000 in total retirement income per annum, rising to €55000pa then the credit is reduced (according to various quotients) to zero. The higher your TOTAL income is the less of the credit you will receive. A total income of more than €55000 per annum means no tax credit.

Government / Local Government / Armed Forces / Police / Teachers pensions etc
This next category is a catch all for any kind of Government or Local authority pension, including Teachers, Police, Firemen, Nurses, Local Authority etc. In effect, where the local or national government of the pension in question is the administrator of the fund.

In this case, if you are a non-Italian resident in Italy, then the pension is not taxable in Italy under the double taxation treaty but only taxable in the state of origin. So, for example. a British Firemen retired and resident in Italy will only have to declare the pension and pay any tax due in the UK under UK tax law. It would not be subject to Italian tax, UNLESS..

…., you are an Italian citizen, i.e have Italian citizenship.. An Italian national living in Italy would be subject to Italian income tax on their overseas local or national pension in the other state. So, in our example above the British fireman, after being granted Italian citizenship would then become liable for Italian taxation on his UK pension. This is something to consider when applying for Italian citizenship. Equally this would apply to anyone who has dual nationality, for example an Italian who has lived and worked abroad for many years and returns to Italy, or someone who has dual nationality through birth right.

Private pensions / Retirement plans / Occupational / Employer pension schemes
Private pensions do not, unfortunately, benefit from the same tax treatment as national or local authority schemes as described above and so they have to be exposed to the full wrath of the Italian income tax rates. They are added to your other income for the tax year and taxed at your highest marginal rate of income tax.

However, I want to expand on this subject slightly, in relation to the subject of trusts which we touched on in my last article.

Definition of a private pension / retirement plan
Before we can accurately define how a pension is taxed we first have to understand its structure. In the case of a UK personal pension, occupational pension and/or retirement plans they are mostly set up as irrevocable trusts. This gives limited powers to the holder of the pension because although you can instruct the trustees to do whatever you want within the tax rules of the country in which it is operated, ultimately the trustee has the final say in what you can do. They wouldn’t normally refuse your instructions to withdrawal capital, for example, but theoretically they could. This is a technical point but one which helps define the taxable liability in Italy.

Essentially, since the pension is a non-resident irrevocable trust, then the rules state that the fund itself is not taxed but any withdrawals would be taxed at your highest rate of income tax. An interesting point is that the fund itself needs to be declared for ‘monitoraggio‘ purposes and specifically your share in that fund. That creates a difficulty in something like a large pension fund e.g. Standard Life, when you need to express your share in that fund. To do that you need to know the value of the total company pension fund in which you are invested and express your fund value as a percentage of it. The truth is that this is almost impossible to find out accurately and so expressing a very low percentage is probably acceptable.

I have heard stories from various people over the years that their commercialisti declare their UK pensions as ‘previdenza complementare‘, which loosely translated means complementary pension. However, the definition does not accurately complete the story here. The reason for declaring it in this manner is that it is taxed at a preferential tax rate of 15%.

I must admit here that I don’t think is the correct way of declaring income from an overseas pension / retirement plan. The ‘previdenza complementare‘ is a vehicle used in Italy to complement the pension which is offered through Italian social security (INPS). You may argue that this has the same purpose as that of an overseas pension fund. However, this is where the similarities end.

In the case of a UK pension fund your contributions would attract tax relief during your contributory life. In the ‘previdenza complementare‘ (PC) the fund is taxable during the life of the fund. The UK scheme is also not linked to the state scheme in any way and you can withdraw money from age 55 (personal pension) or scheme retirement age (occupational pension). The PC is linked to the Italian state retirement age. Lastly, since the contributions into a UK fund are tax relieved, then income paid in form of a pension is subject to income tax at the normal rates. The Italian PC has a preferential rate of taxation starting at 15% and reducing to 9% depending on how many years you have been contributing to the fund, once you reach state retirement age. In short there are some distinct differences which lead me to believe that declaring a pension fund / retirement fund (which is a trust) as a ‘previdenza complementare’ in Italy, in incorrect. If you are in doubt then speak with your commercialista.

That is a basic review of the various types of pension / retirement incomes but is not an exhaustive list and various countries may apply different rules. You may need to check the double taxation treaty of your country for further details. However, all in all pensions are treated like other income, once in retirement and the fund needs to be declared, but not necessarily taxed in the accumulation phase.

If you have any queries about how your retirement income in Italy should be taxed, you can contact me on gareth.horsfall@spectrum-ifa.com or on cell +39 333 6492356

Pension Commencement Lump Sum Tax in Spain – How does it work?

By Chris Burke - Topics: Barcelona, Pensions, spain, UK Pensions
This article is published on: 16th March 2018

16.03.18

There are conflicting stories on how much lump sum/one off amount can you take from your pension if resident in Spain and what the tax will be. Indeed, many people with UK pensions believe it is better to take their UK pension lump sum in the UK before (grey line here if they have already moved!) they move to Spain permanently, as they will pay less tax. Firstly, even if you have a UK pension but are resident in Spain, this has to be declared in Spain. Secondly, if you finished contributing before 2007 you actually can receive MORE tax relief in Spain than in the UK (dependent upon the pension you have and how you take it).

To clarify, in the UK you can currently take a 25% tax free amount from all your private pensions and anymore would then be taxable.

If resident in Spain, you have the right to take up to 100% of your personal pensions in one go (100% in capital), to receive part in capital and part through regular payments or to receive the whole amount through regular payments. If you receive an amount in capital (a whole or a part) then you can apply for a tax reduction of 40% of the amount received for any contributions you made prior to 2007. This option can only be applied once, so, if you have more than one pension plan, you have to receive all of them in the same tax year if you want to apply this reduction.

If you take the amount as a regular payment you will have to pay income tax as if you have received any other general taxable income (a salary for example). In both of these cases, the amount that is taxed (with or without the 40%) is subject to the general income tax rate.

Lump Sum Pension Tax in Spain Lump Sum

Total amount of pensions £150,000
Amount to be taken in lump sum/one off £50,000
Amount tax exempt in Spain £20,000
Pension lump sum amount income taxable £30,000 (added to your annual income tax band)

 

Now if we look at the UK example we shall see the difference

Total amount of pensions £150,000
Amount to be taken in lump sum £50,000
Amount tax exempt in the UK £37,500
Pension lump sum amount income taxable £13,000 (added to your annual income tax band)

However, in the following scenario the Spain example works more in your favour:

Total amount of pensions £100,000
Amount to be taken in lump sum/one off £100,000
Amount tax exempt in Spain £40,000
Pension lump sum amount income taxable £60,000 (added to your annual income tax band)

 

UK Example

Total amount of pensions £100,000
Amount to be taken in lump sum/one off £100,000
Amount tax exempt in Spain £25,000
Pension lump sum amount income taxable £75,000 (added to your annual income tax band)

Important points to note here are:
If you cash in your UK pension OVER 25% and are registered in the UK as a non resident, an emergency tax code is likely to be used up to 45% and you will have to claim back what is owed to you. Unless you are able to provide a P45 from the current tax year following withdrawal from employment and/or current pension plan,

or

The pension provider already holds a P45 or up to date cumulative tax code received from HMRC as the result of previous withdrawals from that pension plan, and can apply it.

If you take your UK pension as a 25% lump sum, this should be declared in Spain and would apply to the Spanish rules of 40% being tax exempt and the rest income taxable. You would therefore pay any tax owed in Spain.

Only the FIRST Lump Sum is tax exempt so it’s important to realise that and make sure you plan effectively.

Regular payments from your pension fall under income tax

From 2007 onwards there is NO tax exemption of this kind.

Top Tips For Your Pension Lump Sum/One Off
When taking your lump sum, take it in the year that is most tax efficient for you, such as when you have lower income from other sources.

Moving your pension outside the UK could give you more freedom, more choices and potentially less tax to pay in the long term (depending on your situation).

Source: Silvia Gabarró GM Tax Consultancy Barcelona

Pension Healthcheck – Tips and Advice for 2018

By Chris Burke - Topics: Barcelona, pension transfer, Pensions, QROPS, Retirement, spain
This article is published on: 2nd March 2018

02.03.18

Whether you are thinking about the amount of pension you want in the future or are approaching retirement, a pension health check might be the answer you are looking for. With the UK government bringing in autoenrolment (the process by where companies who employ at least 1 person have to make sure they save into a pension) which has been massively successful, it is clear that as the years go by and with people living longer, it is more important than ever to save for the future. A pension healthcheck is your chance to ask general questions, be proactive and start planning for your retirement. Every year that you don’t start a pension, the amount of money that you will require becomes a lot more expensive for you to achieve, due to the effects of compound growth.

The UK population is projected to continue growing, reaching over 74 million by 2039. It is also getting older with 18% aged 65 and over and 2.4% aged 85 and over. In 2016 there were 285 people aged 65 and over for every 1,000 people aged 16 to 64 years (“traditional working age”). Years ago, people generally retired at 55 and perhaps lived until 66/67 meaning 12 years of retirement income. Now, retirement starts at 60/65 and the average life expectancy is Europe is around 85. So mathematically, you can see the issue, which is why 89% of final salary pension schemes in the UK are financially in trouble: their calculations were not initiated on this model of retirement and life expectancy.

Are pensions the answer?
This is debatable for many circumstances, particularly in Spain where you do not receive tax relief on large pension contributions. Many years ago it was different, when you could put tens of thousands of pounds into a pension and receive tax relief, or a company paid into it for you. However, in today’s world most people don’t fall under this scenario.

What IS the answer to retirement planning?
Make sure any assets you own work for you, including rental properties, investments, inheritances or money saved regularly. Yes, you can receive tax relief on money you save into a pension purse, however, this money is usually blocked (except in the case of critical illness or disability) until you are allowed to have it and has to always act like a pension, i.e. less flexibility and adhering to pension rules.
Therefore when thinking about retirement you should focus on the following tips to truly give you flexibility, confidence in your retirement and peace of mind:

Maximise Property Assets
If you own property, is it earning you the real value of your money invested in it? For example, a property investor today would usually want to receive a 7% return on their investment to make it worth their while:

Annual rent of property: €15,000 pa
Property Value:€300,000
Annual yield:annual rental, divided by property price, x 100 = 5%.

This may or may not take into account any expenses on the property you have. Are you also paying an agency to look after your property? Here are some areas to work on:
Is the rent high enough given the amount of money invested?

Can you reduce the costs of running the property, i.e. maintenance/agency fees? If they have been managing it for a while and there isn’t too much for them to do, ask them to ‘sharpen’ their pencil. More often than not they will, as they won’t want to lose the regular income you provide them.

Investments/stocks/shares/funds
How are these performing? Dividend paying shares (that is those with the payments /bonuses given to you, reinvested) historically are one of the best performing investments (including property).
Are they outperforming the markets, or being managed less erratically? That means not going down as sharply as the markets do and giving a less volatile return, which in turn gives you security of capital invested

The key areas to note here are:

  • Performance
  • Fees
  • Trust in advice given

Pensions
Are you currently saving into a pension and if not, what are you doing instead (as I said above it doesn’t have to be a specific pension purse). Have you accumulated more than one pension, if so what are they all doing, how are they being looked after and where might you be when you retire?

Key points to find out:

  • Details/values/contact details of any pensions you have
  • What are they invested in and how are they performing?
  • What are your options?

When you have gathered all the necessary information (or the advisor can gather this for you with your authority), you can then sit down with a professional and talk through your options and what journey your life might take. You can also look at maximising your National Insurance contributions (a mathematical no brainer in many people’s circumstances, even if you live outside the UK) and planning what you can do to make sure moving forward you are maximising your assets and turning them into a comfortable retirement.

€200,000, achieving a 6% net return over a 27 year period would achieve 1 million Euros…….with good advice, planning and consistent reviews.