Have you worked around the world – now retiring with an Overseas Pension fund and wondering how will this be taxed …?
Working overseas can be an important part of any career, and is increasingly common in a global marketplace, but the result can be that a significant portion of retirement savings may often be accrued overseas in a variety of different schemes. How these pensions are taxed when they are paid to a retiree in the UK can be very different, depending on when these pension benefits accrued, where they were resident when accruing benefits, the type of pension involved, and crucially how the pension benefits are then distributed.
Is it a ‘Pension’
It is firstly important to establish the nature of the payments made. Globally mobile employees are often provided with savings arrangements which the employer will refer to as a ‘retirement fund’, and it is usually assumed that withdrawals from such funds would be taxed as pension income, but HMRC may view these schemes very differently for tax purposes, meaning they could instead to subject to income tax as employment income, or even capital gains tax as a return on an investment.
Assuming it is a ‘Pension’ – then firstly apply the ‘default’ position
If you are resident in the UK, then the ‘default’ position is that you are taxable on worldwide income, wherever this is paid, and this includes pension income. You may also find that the country where the pension is from, may additionally seek to tax the pension, and this is where it’s important to understand the application of Double Tax Treaties, and how they can help to eliminate double taxation.
Annual Pension Payments
It is generally the case that most Treaties award taxing rights to the individual’s country of tax residence when it comes to annual pension income, rather than the source country. So for example, if someone is tax resident in Spain, and receives a UK, former workplace annual pension, this would only be taxable in Spain, and HMRC would usually accept an application to have the pension paid to that individual, without deduction of tax at source via Pay as You Earn (PAYE).
Lump Sum Withdrawals
It can be difficult to determine if a series of payments is a ‘pension’ or a series of lump sums, and there is very little guidance in legislation or via HMRC commentary to help clarify the position in each case.
In addition, many Tax Treaties remain silent on this particular point, meaning the source country may still have taxing rights over these types of withdrawals. The 2015 pension freedoms, allowing anyone over 55 to withdraw their entire pension, has resulted in many choosing to extract entire pension funds in lump sums, and we have seen examples where 100% of the pension withdrawals were then taxed at higher rates of income tax in the UK, despite that person being resident elsewhere for many years.
Some countries are very clear that taxing rights apply to lump sums in the country of residence, for example Portugal. If you qualify as a ‘Non Habitual Resident’ (where you can access various reliefs and exemptions for the first 10 years of Portuguese residence) then you could withdraw your entire UK personal pension free of UK tax and also completely escape tax on this in Portugal. (Note this position may soon be changing according to proposed changes in 2019 Portuguese legislation)
Reporting and Tax Compliance
Reporting the income correctly is important, particularly now that countries are exchanging and sharing information on an unprecedented scale under the terms of the Common Reporting Standard (CRS).
Even if another country has sole taxing rights on pension benefits, individuals still need to report the income on Tax Returns, including an appropriate claim for Treaty Relief.
Where retirement is around the corner, it absolutely makes sense to understand the tax implications of withdrawals from any overseas pensions or alternate retirement plans, and even more important if considering a move back to the UK from overseas.
Planning ahead, and as a consequence establishing what tax efficient withdrawals can be taken from any fund, could save many thousands of pounds in associated tax due, either in the UK or overseas.
For more information please contact Lynn Gracie (firstname.lastname@example.org) or your usual AAB contact.
To find out more about Lynn and the Private Client team, click here.