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Showing posts from tagged with: previdenza complementare

How is my UK Pension taxed in Italy?

By Gareth Horsfall - Topics: Italy, UK Pensions, UK pensions in Italy
This article is published on: 2nd October 2020

02.10.20

There is nothing like a cold snap to focus the mind and it certainly arrived with a bang this year. In Rome we lost about 20 degrees of temperature in a week. However, I have to confess that I am rather glad that the autumn months are now upon us because the prolonged hot temperatures play havoc with trying to be productive.

In this article, as you will see, there are a number of shorter topics, but ones which I think are relevant for our lives in Italy. During the summer I have been scanning the financial papers and the ‘norme e tributi’ pages of Sole 24 Ore to see what might affect our lives in the future. Fortunately, the Italian government seemed to give us a break this year and I didn’t find much of significant interest. However, a number of other matters have arisen in the last few weeks

UK pensions and tax when living in Italy

Let’s start with one of the more interesting matters that arose during the summer. I was contacted by a client who was enquiring about taking money out of her QROPS pension (a QROPS is a UK pension that has been moved away from the UK but still operates like a UK pension – useful when living abroad!).

I have always advised my clients that any withdrawals from a UK personal pension are taxed at income tax rates in Italy, but over the last few years I have come across a number of clients whose commercialista has been declaring the pension as a ‘previdenza complementare’. This is the Italian equivalent of a UK personal pension. The main reason for choosing this route seemed to be a preferential flat tax rate of 15%. My argument has always been that the 2 structures have fundamentally different characteristics and therefore a UK personal pension should be considered an irrevocable trust, hence withdrawals are subject to income tax. In fact as far back as June 2018 I wrote the following in an article:

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. 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 the accumulation phase. In the ‘previdenza complementare‘ (PC) the fund is taxable during the accumulation phase. 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 paid gross into the plan, then the income is instead taxed on the way out, 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, because it is taxed during the accumulation phase. 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, is incorrect. If you are in doubt then speak with your commercialista.

In a lot of cases I was informed that the commercialista had contacted the local Agenzia delle Entrate and they had confirmed that this is correct. So, who was I to challenge it? However, I still believed that it was incorrect. Of course, no-one challenged it because it also meant the difference between being paying a 15% flat tax rate on that income or progressive income tax rates starting from 23%.

However, during the summer the client I referred to above contacted her commercialista, who did not accept this definition, but in fact presented an ‘interpello’ issued by the Agenzia delle Entrate (an interpello is basically an ‘opinion’ from the Agenzia delle Entrate on a specific case that is presented to them) from May 2020 regarding a UK personal pension holder.

In the interpello (which you can find HEREthe interesting part starts on page 7) it indicates that a UK personal pension should not be considered a ‘previdenza complementare’, but should actually be subject to progressive tax rates in Italy. This is quite an eye-opener because if this is the case, then it flies against the information gained from various commercialisti.

I should add here that the interpello is merely an indicative judgment in this particular case and is by no means a definitive decision for everyone holding a UK personal pension and resident in Italy. However, the fact that the AdE has gone to the trouble to write this gives us a pretty good idea into their thinking, should they choose to follow it up.

final salary pension review

What to do?
So what should you do if your commercialista has advised you to declare your UK personal pension as a ‘previdenza complementare’ and you are now benefitting from the 15% flat tax rate? I would take the interpello to them and ask their opinion based on the new evidence. Or you may choose to do nothing. Whatever your choice or the advice from the commercialista, we are now a little more enlightened into the thoughts of the Agenzia delle Entrate on this topic.

Brexit
It is worth noting here that Brexit is almost upon us and whatever your opinion as to how the UK will exit, a messy unfriendly exit may bring a few matters to light. In particular, the interpello also states that pension funds which ‘could’ be deemed to qualify are those which conduct business cross border and meet the pension rules of both EU states in which they are operating. I don’t know of a UK personal pension provider that does this anyway, but the mere fact that the UK is in the EU may gloss over some of these finer points. But then, what will happen once the UK leaves the EU?

Which leads nicely on to the next problem that Brits are now facing in Italy.

Bank account closures for UK citizens living in the EU

By now, I am sure you have read the headlines saying that a number of UK banks are contacting or have contacted their customers living in the EU to close down their UK banks accounts, potentially leaving them without a UK account. To date the main culprits are the Lloyds banking group, which includes Halifax and the Royal Bank of Scotland, Coutts and Barclays.

I am afraid to say that the rumours are true and I know of a number of people who have been contacted already.

The culprit, of course, is Brexit…

Avoiding bank charges

These banks have now had to weigh up the benefits of retaining bank account holders in the EU post Brexit, because once they out of the EU market place they will be forced to adhere to individual EU jurisdictional regulations, as well as UK regulations, if they want to continue to service clients in any EU state. Clearly, for a bank which has no intention of developing business in Italy (in our case), nor does it have a sufficiently large client base in Italy already, then they are going to need to look to close down activities in those jurisdictions to ensure they do not fall foul of the regulators.

It is interesting that, in contrast, HSBC Bank has not decided to pull from its EU markets because it has sufficient activities which take place throughout the EU. I have also heard that Nationwide is also not pulling any activities just yet.

For many clients this is going to be a very tough time, as you could lose a bank account in the UK when you may still have bills being paid, or you simply use it when you are in the UK. To make matters worse, because you are no longer a resident in the UK, you can no longer request an account from another UK banking group.

Many of the groups will also offer their international bank account services, of which the majority are based in the Isle of Man. This is not a good idea because the Isle of Man is not in the UK, but is a UK dependant territory and is deemed a fiscal paradise. It is currently on the grey list of ‘could do better’ in global fiscal transparency with the EU. It is anyone’s guess what will happen after the UK leaves the EU, but it is certainly not beyond imagination that the EU will look to impose punitive tax measures for anyone holding accounts in UK offshore jurisdictions. Let’s not forget that it only came off the black list in 2015!

So, without any other options perhaps one of the better solutions is to look at an Italian bank which can provide a GBP account. I have used Fineco for years, and recommend it to many clients. They offer a EUR current account linked to a GBP and USD account and transfers of cash between accounts are made at spot rate, with no fee. It might be a solution, but will be no consolation for losing your UK bank account. Once again, another downside of Brexit for those of us that have chosen to live in the EU.

bank-vault

Why you should never leave more than €100,000 (or currency equivalent) in your bank account

Still on the subject of banking, does the sound of a bad bank sound appealing to you? A bank that is so bad that it can take all the bad from all the other banks and just keep it there and away from us all. It sounds like a great idea in theory.

On the 25th September the EU had a consultation round table event with a number of European bank leaders, asset management groups and government officials to discuss the possibility of creating a European-wide ‘bad bank’ which would take all that bad debt (debt which cannot be paid back for one reason or another) and which is currently sat on the balance sheets of a lot of European banks, particularly Italian ones and other Southern European states. The idea being that this bad debt could be whisked away from the banks, freeing them up from the worry of having to manage this debt and giving them the liberty to start lending once again, supposedly to individuals and businesses which pose a better credit risk and would be more reliable at paying the debt back.

So far so good. I would not argue at this point. It seems like a good idea to help stimulate economies especially after the COVID-19 crisis.

But morally, should we accept this?

This is the argument put forward by a number of EU functionaries who argue that the banks are, once again, getting another bail out at the cost of the taxpayer. You and I.

To remedy this, the ‘Bank recovery and resolution directive’ (BRRD) has proposed that certain parties should also have to meet some of that cost as well as the EU/taxpayer. Those parties have been identified as the shareholders of the bank, holders of the banks bonds and lastly, the one that should interest us all: deposit holders with more than €100,000 or currency equivalent held in any banking group. Does this mean that the EU, to fund the COVID-19 crisis, could make a cash grab on deposit holders with more than €100,000 or currency equivalent in their accounts? At this point it is only a proposal, but I shall be watching this space carefully.

Based on this news, there is probably no better time to look at your financial plans closely, especially if you are holding high levels of cash in any banks around Europe.

NS&I slashes rates!

You might be someone who has been investing in NS&I products in the UK as a diversifier to your other holdings, or maybe just someone who likes to ‘play it safe’ with your money.

National Savings and Investments

National Savings and Investments, NS&I, are backed by the UK government and due to the COVID-19 crisis, the government has now moved to slash rates on all national savings products to the point where you have to ask yourself, ‘are they worth it?’

The rate on the Direct Saver account has been slashed from 1% interest per annum to just 0.15%. Income Bonds, which have for a long time been considered a best buy, have been slashed from 1% interest rate to just 0.01% pa.

Not only that, but the average interest rate on Premium Bonds (with the chance to win the big prize) will fall from 1.4% to just 1% and the amount of prizes issued will be reduced significantly.

If that is not enough, the Bank of England is also toying with the idea of introducing a negative base interest rate. If they apply that to the NS&I products, then you will be effectively paying the government to hold them.

Time to consider alternatives to protect your capital?

Digital Payments

Cashback for cashless transactions

Italy has been desperately trying to find ways for the people to start using digital forms of payment instead of cash so that the economy can become more fiscally transparent and they can raise more tax revenue.

By the end of November we will have confirmation on the new push to drive people towards using digital methods of payments in Italy, even for small transactions, such a buying coffee at the bar. The Italian government has come up with an idea to incentivise the drive to digital forms of payment.

Firstly, from next year the maximum spend on contactless forms of payment will rise from €30 to €50.

In addition, they have dreamt up another seemingly difficult to navigate proposal for a refund of expenses paid by card payments. I will have a go at deciphering it here:

1. You will get a 10% reimbursement on expenses paid up to a maximum spend of €3000 per annum (hence a tax refund of max €300 pa).

2. But, to achieve this you must make a minimum of 50 transactions every 6 months (100 every year) and the €3000 is in fact split into a spend of a maximum of €1500 every 6 months. The idea being that you can’t just go and spend on something costing €1500 every 6 months or a series of high value items to reach the limit.

To receive the refund you will need to register on the app and enter your codice fiscale, and your debit/credit card details.

3. Not only are they offering cash back on transactions but they are discussing a ‘super cashback’ prize of €3000 for the first 100,000 people who reach the maximum number of digital transactions in a year, within the limits provided above.

Certainly food for thought. Watch out for confirmation of these offers sometime before the end of November and then start registering to get your cashback. In theory it should be easy, but based on previous experience of Italian government initiatives I fear it may turn out to be more complicated than first glance.

I hoped you have enjoyed this ‘return to normality’ article. I will be sending out more information in the coming weeks and months to keep you up to speed with the goings on in the financial world and how that might impact our lives in Italy.

If any information from this article has interested you and you would like to get in contact, you can reach me on gareth.horsfall@spectrum-ifa.com or on cell phone 333 649 2356 by call, sms or whatsapp.

Gareth Horsfall ezine

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