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 firstname.lastname@example.org or on cell +39 333 6492356