Confused about your pension? What happens if you retire abroad?

Now pensioners are no longer obliged to buy an annuity, Guardian Money considers your options. This week we look at the pros and cons of heading to somewhere in the sun. 

It sounds a brilliant wheeze: if you take all your pension pot at retirement under the new freedoms that come into force next April, the tax bill could be massive, with HMRC pocketing 45% of everything over £150,000; but what if you hop off to some sunny, low-tax location such as Gibraltar, Cyprus or even Australia, transfer the pension money over to the new country, and draw it down there, avoiding almost all the tax in the UK? Pop back a year later, and you’ll have managed to take your pension pot almost tax-free, or so the story goes. It’s an idea that has been doing the rounds in the online comment section below our recent stories on the new pension freedoms. Trouble is, it’s not anywhere near as easy as people make out.


The Gibraltar/Dubai tax-free option

If you take your pension in Gibraltar, the tax rate is just 2.5%. In Dubai it is zero. So if you have a £500,000 pension pot, and exercise your new right to withdraw the lot, the tax saving could be more than £150,000. But there’s no chance that HMRC will let you transfer your money out there and take it tax-free if you have any plans on coming back to the UK soon. Mike Warburton, tax director at accountants Grant Thornton says: “This would be caught by the temporary non-resident rules.” This means that you will be charged the full amount of tax if you return to live in the UK at any time within the following five years.

You will also have to establish residency in your offshore tax haven. What’s more, you will have to decide what to do with your money when you are there – and the quality and security of local financial services firms and banks may not be entirely robust.


The Australian option – if you’re rich

If you are very wealthy, Australia and New Zealand present an interesting opportunity. In Britain you obtain tax relief on the money you pay into a pension scheme when working, but at retirement the income you take is taxed in the normal way. In Australia, there are no tax advantages when putting money into a pension, but it’s free of tax when you take it out. So if Britons retire to Adelaide, take their pension pots with them and draw them out there, they can almost completely avoid tax.

There are, however, some catches. As Paul Davies of advisers says, you have to transfer your money to an HMRC-approved qualifying recognised overseas pension scheme (Qrops), then wait five years before you can take the full amount tax-free – although that might change next year. But the big drawback is that to get into Australia, the main avenue is the investor retirement visa, which obliges you to bring in assets of at least A$750,000 (£411,000), invest A$500,000 (£274,000) and prove a separate minimum income of A$65,000 (£35,700) a year.


What happens if I retire to Spain?

If you’ve qualified for your state pension, it will be paid (and taxed) in Spain, but uprated every year in the same way as the UK. Note that the personal tax allowance in Spain is €6,069 (£4,923) compared with £10,000 in the UK. The basic rate of tax is also higher, at around 24% compared to 20% in the UK. And in Spain there is no 25% tax free lump sum available when retiring, and any Isas you have in the UK will be liable for tax if you become resident in Spain.

But Andrew Oliver, of deVere financial advisers, says that if the pension money is transferred to a Qrops, there are ways to cut the subsequent tax bill to as little as 3% to 8% by drawing down the income through temporary annuities and bond investments – although there are costs to having the money in one of these plans. There’s also an equivalent to Isas in Spain which, though not as generous, do offer tax advantages.

Source: The Guardian