By Portugal team
This article is published on: 21st September 2023
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By Portugal team
This article is published on: 13th July 2023
Taxation of pensions in Portugal is complicated. The type of pension, how it is funded and how it is paid out can affect the rate of tax you pay and it becomes even more confusing when you have to consider potential taxes in the source country. Mark and Debrah examine the rules on taxation and the steps you should take to save your hard-earned cash.
Over the years we have seen different ways of reporting pensions in Portugal. This is because the Portuguese rules do not quite fit the complex UK pension rules and there is also a lot of confusion, even amongst professionals, about the nature of pensions. Sometimes this results in a favourable outcome, but in other instances, we have seen people paying more tax than they need to.
What is a pension in Portugal?
Portugal views a pension as a regular series of income payments. This can get confusing as from a UK context, pensions can be paid out as a series of income payments or lump sums.
Portuguese law does not specify a time period for payments to be deemed a pension, but it is generally considered amongst professionals that payments made on predetermined dates and at predetermined amounts would be deemed pension income.
Ad hoc payments could be deemed lump sums and would receive different tax treatment (as long there were no employer contributions). Here, the growth element is taxed at 28% and the capital is returned free of tax. There is a tax reduction of 20% after 5 years and 60% after 8 years. It is best to speak to your accountant on reporting options as they will be performing your submission.
UK Government pensions
These pensions are acquired by working for the state. In the UK these are generally armed forces, local authority and some types of NHS pensions (a full list can be found on HMRC’s website).
These are always taxable in the source country and tax is deducted at source. Portugal does not tax these pensions, but they must be reported in Portugal, and they do count when assessing your other taxable income in Portugal.
All other pensions are taxable in Portugal (not the UK) and each person has an annual deduction of €4,104 against pension income
UK state pension
The UK state pension is taxable in Portugal only. No tax is due in the UK. The pension can be paid out free of tax to you from the UK once HMRC are satisfied you are no longer a UK resident. Otherwise, UK tax will be deducted at source and you must reclaim this.
For Non-Habitual Residents (NHR), the tax due in Portugal is 10% (unless you have pre 31st March 2020 NHR, in which case it is 0%). For normal residents, scale rates of tax apply which for 2023 are 14.5% to 48%.
Occupational pensions
These pensions are funded solely by an employer, or by employer and employee contributions from pre-tax income.
If you can determine the split between employer and employee contributions, the former are taxed at the prevailing rate and the latter can receive 85%/15% treatment i.e. 85% is returned free of tax and 15% is taxed at the prevailing rate. If this cannot be determined, the whole amount will be taxed at the prevailing rate of tax.
For NHRs, the rate is 10% (or 0% for pre-2020). For non-NHRs, it is the scale rates of tax.
Personal pensions
Where a personal pension was solely funded by personal contributions made with after-tax income, then it is possible to apply long-term savings taxation rules which can be more favourable. Here, only the growth element of any income received is taxed at 28%, with tax reductions after years 5 and 8 resulting in effective rates of tax of 22.4%and 11.2% respectively.
If there are contributions made in resect of employment activity e.g by an employer or via pre-tax income, then scale rates are likely to apply to the full pension, unless you can distinguish between the contributions.
What about the 25% PCLS?
Portugal does not recognise the UK concept of a 25% pension commencement lump sum. So, if your retirement plan is to take this, then it is best to do it whilst UK tax resident. If taken once resident in Portugal, the above tax rates will apply.
Get your UK pension paid out to you gross
Firstly, you must complete a ‘DT Individual’ form. This is available online from HMRC. You then submit this form to HMRC with a proof of residency in Portugal certificate, which you can obtain from the finances portal. You will need to take an income from the pension to trigger the process, which is likely to be emergency taxed so just take a small amount. Once your provider receives notification of a ‘nil rate tax code’ from HMRC they will pay your pension out to you without deducting UK tax.
What else should you be aware of?
The UK government recently changed the ‘lifetime allowance’ (LTA) rules. Contrary to the common belief that this has been ‘abolished’, the rules actually state that no charge will apply for 2023/24. This difference is important for those thinking of taking their pension benefits during this window of opportunity.
Previously the LTA was capped at £1,073,100. After which pension savings suffered a tax charge of 25% if taken as income or 55% if a lump sum. Lump sums were taxed more heavily as it assumed that 25% represented the LTA excess charge and a further 25% represented an income tax charge. The new rules remove the 25% LTA excess charge but not the 25% income tax charge, so when taking amounts above the LTA as lump sums, a 25% deemed income tax charge will still apply.
Either way, this provides a unique opportunity for those with large pension pots. This opportunity however is not guaranteed for the future as commentators believe that a Labour win in the next election will likely see this reinstated.
Lastly, currently, assets within a pension can be passed down free of UK inheritance tax (IHT) and they have become crucial planning tools for UK domiciles. Similarly, income tax is not payable by beneficiaries if the pension holder dies before age 75 (tax is payable if death occurs after 75).
There have been ever-increasing murmurings of the introduction of inheritance tax applying to pensions and income tax being imposed on beneficiaries where death occurs before age 75. The most recent and serious being at the end of 2022 when the Institute for Financial Studies published a report recommending changes to the rules and stating that these changes could bolster government funds by £1.9 billion.
It could be an opportune time for you to review your pension planning with this and your beneficiaries in mind.
By Portugal team
This article is published on: 6th February 2023
Could the UK government take up to 60% of your pension?
The Institute for Fiscal Studies (IFS) published a paper on 15th December 2022 recommending that the UK government introduce a basic rate (20%) income tax charge and Inheritance Tax (IHT) at 40% on monies left in UK pensions on death, regardless of age.
Generosity of current rules
Under current rules, your pension can pass to your beneficiaries free of UK Inheritance Tax (IHT), rather than being subject to the standard 40% rate. Additionally, if you die before age 75, your beneficiaries do not need to pay any tax on drawdown/lump sums. If you die after 75, and your beneficiaries are UK tax resident, they are subject to income tax at their marginal rate.
This is what makes pensions so valuable for tax planning and advisers will usually recommend that they are maximised and preserved, and that other assets subject to IHT are used to fund spending first, to reduce the value of your estate.
What could change?
The IFS pointed out that the current tax rules on UK pensions are very generous and pensions have become a succession planning tool rather than one for retirement provision.
Experts are musing that the UK government could change these generous IHT rules; many say this is overdue. More worryingly, they are anticipating a potential change in 2023.
The IFS recommended that a basic 20% rate is applied to any pension savings left on death, irrespective of age. Also, the pension should form part of the deceased’s estate for IHT, incurring a further 40% tax.
Why the change?
Simply put, changing the pension IHT rules would fill a big hole in the Exchequer’s coffers by bringing millions of pensions into the IHT net. It would also persuade many people to start spending their pension pots and in turn, pay income tax on the drawdown during their lifetimes.
The report explained how the generous UK pension rules specifically in relation to IHT have caused a “bizarre situation” where instead of pensions primarily being an attractive structure for old-age-planning, they have become a lucrative IHT loophole. The IFS also pointed out, “if we are to have an inheritance tax at all, it should apply evenly across all forms of wealth.”
We have also seen pensions being periodically targeted over the past decades, with taxation and limits applied in the form of Annual Allowance, Money Purchase Annual Allowance and the continuing reduction of the Lifetime Allowance, from £1.8.m in 2011/2012 to £1,073,100 in the tax year 2022/2023 – all with the aim of curbing the tax benefits. There are even serious talks of bringing the increase in the UK State Pension age forward from 2046 to 2035.
Will this affect you?
Those with estates valued in excess of £325,000 (if single) or £650,000 (jointly), including pension values, would be affected by any potential change.
It is unclear how any potential change would be introduced, although the IFS has suggested phasing in changes. It is also unclear if existing benefits would be sheltered from the change or if the rules would be retrospective, thus catching all pension savers. Although, the IFS did say that even with phasing, there would be some retrospective taxation effect.
What should you do?
Of course, there is no guarantee this will happen, but if changes are imposed there may be little or no opportunity to restructure your pensions. As a non-UK resident, you can take action now and review your finances to ensure you are protected.
By Mark Quinn
This article is published on: 10th October 2022
Qualifying Non-UK Pension Scheme (QNUPS) was introduced by HMRC in 2010. In simple terms, it is a type of international pension that must adhere to certain HMRC rules to be recognised by HMRC. A QNUPS should not be confused with a QROPS (Qualifying Recognised Overseas Pension Scheme). This week, we will discuss the basics of QNUPS for Portuguese tax residents.
When might you need one?
Investors that have diverse investment needs may benefit as they can hold a wider range of assets than a traditional pension or QROPS. For example, it is particularly beneficial for holding residential UK property or for more adventurous investments such as a collection of fine wine or racehorses. But for the average investor looking to save towards or draw income for their retirement, this is unlikely to be a benefit worth paying for, there are alternative structures that could be more suitable.
Contributions paid to a QNUPS do not benefit from tax relief which is a disadvantage for savers who have qualifying contributions. However, the contributions to a QNUPS do not count towards the UK Annual Allowance, so can be a great way to save pension benefits in excess of £40,000 p.a. (2022/2023).
Are there really advantages?
The UK Inheritance Tax (IHT) advantage is not a reason to establish a QNUPS, and if set up for these purposes, HMRC may view this as tax avoidance and there could be severe tax consequences and we have seen penalties of up to 200% for failed schemes. It must be set up for genuine retirement purposes e.g. the individual could not contribute to a regulated pension.
Tax-free roll-up within the structure: this is also a benefit of UK-based pensions and other non-pension savings structures available in Portugal. A transfer to QNUPS is not required to achieve this.
Income tax benefits: all foreign retirement income will benefit under Non-Habitual Residence (NHR). Post NHR, depending on how the pension was funded, income can be taxed at scale rates of income tax, as an annuity or as a long-term savings vehicle. You do not need a QNUPS to access such benefits and it is worth noting here that there are non-pension-based investments that offer significant tax advantages, irrespective of NHR status.
Death benefits: in Portugal, only Portuguese-based assets are subject to Stamp Duty on death if the recipient is a non-directline ascendant or descendant. So, this tax can be avoided (if assets are passing to non-immediate family) by keeping any pension or investment structure outside of Portugal. You do not need a QNUPS to access this.
Currency options: Most EU-based savings and pension schemes can offer flexible currency investment and income options.
Cost: consolidation of assets can bring about cost savings, but a QNUPS requires a ‘platform’ or savings vehicle within it to hold investments. This adds an extra layer of cost to a client think carefully if the additional cost is worth the benefits of a QNUPS.
Income provision: you must take benefits from a QNUPS during your lifetime, you cannot leave the whole fund untouched as a tax-free legacy to your beneficiaries. This must be considered post-NHR when pension income can be aggressively taxed.
Political and legislation risk: QNUPS are based on UK legislation and in order to benefit from the UK IHT advantages must continue to do so, so are still at the mercy of the UK’s political and legislative regime.
Conclusion
QNUPS are a beneficial structure if used in the right circumstances however if miss sold, they can be expensive and unnecessary, as well as have a negative tax impact on death.
If you have or are considering a QNUPS and wish to discuss the cost and suitability for your circumstances, please contact us.
By Mark Quinn
This article is published on: 26th September 2022
I’m asked the above question by many clients, and the short answer is – yes. Whether it is the best thing to do however is something that should be looked into on a case-by-case basis with a qualified pension specialist.
Here, we will look at the general tax position of UK personal pensions, Self-Invested Personal Pensions (SIPP), defined benefit schemes and qualifying recognised overseas pension schemes (QROPS) for Portuguese tax residents and the restructuring options available.
Income tax
For Portuguese tax residents, the income tax position of having a UK pension scheme and a QROPS is the same. During NHR, pension income will be taxed at 10% or 0%, depending on your NHR status. Post-NHR, generally the income will be subject to scale rates of tax.
From a UK perspective, generally, UK pension income will not be taxable in the UK and you can request to have it paid out to you in Portugal gross. This will avoid the onerous process of claiming back tax at source from HMRC. I say generally because if you have a UK-based government scheme e.g. civil service, military or certain NHS schemes, the UK retains the taxing right and the income will always remain taxable in the UK.
All pension income, irrespective of which country has the taxing right, must be declared in Portugal if you are a resident there. You will receive a tax credit for any tax paid to HMRC, so you will not have to pay tax twice on the same income.
There is no UK taxation on overseas pensions held by Portuguese tax residents as there is no UK dimension to consider.
Inheritance tax
The death tax position between having a UK-based pension and a QROPS is also the same i.e. both will be outside of your estate for UK Inheritance Tax purposes.
From a Portuguese perspective, as long as the scheme is not Portuguese based, it will not attract Stamp Duty (10%) on death.
What are the options?
Your options will depend on the type of pension you have, the scheme rules and whether you have already taken income or not, but generally, your options will be:
Choosing to do nothing can be just as detrimental to your pension value as being misadvised, particularly in the long term. You should conduct regular reviews (at least annually) and address aspects such as your risk profile, capacity for loss, income requirements, rebalancing or switching underlying investments, and changes to your objectives and family circumstances.
Why would you consider a transfer QROPS?
QROPS is something that is pushed on expatriates by many offshore advisers as this is how fees are generated, and although the advice itself may not be ‘bad’, it might not be the ‘most appropriate’. So, if you are considering transferring to a QROPS we recommend that you get several opinions and ensure you only take advice from appropriately qualified advisers and reputable firms.
QROPS tends to be more expensive than UK based pension schemes because of the international dimension. For some individuals, a QROPS is the right thing but for others it is an unnecessary expense.
Some instances where a transfer to a QROPS could be beneficial are:
To reduce currency risk: a UK pension scheme will inevitably be denominated in Sterling, and this will involve regular currency conversions to meet spending needs in Euros. If the Sterling/Euro rate is low then your purchasing power diminishes. This leads some to look at overseas pensions which can be denominated in Euros or a mixture of most major currencies.
If you are in excess, or close to, the UK Lifetime Allowance (LTA): for 2022 the UK LTA is £1,073,100. The trend over the last couple of decades has seen the LTA continually reduce.
Once you exceed the LTA, the excess is taxed at either 25% or 55% depending on how the income is taken. You cannot avoid this tax, as even if you do not access your pension, you will be tested against the LTA at age 75. Likewise, if you do access your pension before age 75, your benefits will be tested again at age 75 effectively taxing any growth since you first accessed your pension benefits.
The UK LTA cap does not apply to overseas schemes, so a transfer out can be beneficial for those close to, or over the LTA.
Qualified professional advice
You have worked your whole life to fund your retirement savings, and many are reliant on this to provide an income into old age or to provide a legacy to loved ones. Ensure you speak to the right people to protect your wealth. Spectrum has in-house pension specialists and can offer a complimentary and impartial analysis of your pension schemes.
We are Chartered Financial Planners (CII, UK) and Tax Advisers (ATT, UK) with a wealth of experience in both the UK and Portugal providing cross-border advice. You can contact us through the form below or by phone on +351 289 355 316 or by email at mark.quinn@spectrum-ifa.com / debrah.broadfield@spectrum-ifa.com.
By Mark Quinn
This article is published on: 30th November 2021
Pensions are somewhat a confusing area in Portugal and the tax system does not easily accommodate the many different types of pensions individuals may have. We have seen many professionals report pensions in different ways, depending on their interpretation or understanding of the pension in question.
As there are many types of pension schemes and ways of funding them, maybe with overseas or UK elements, this area can be quite tricky to navigate and it is best to seek advice from a professional with a proper understanding of the details.
Speaking generally, for those with NHR, UK pension income is taxed at a flat rate of 10% in Portugal, unless you successfully applied for NHR before April 2020, in which case it is free of tax.
For normal residents, pension income is generally taxed at scale rates. There are some exceptions to this for example, annuities or certain pensions that are treated as long-term savings.
UK pensions are usually taxed at source but in most cases, you can ask your pension provider to make payments out to you gross; this avoids you having to reclaim the tax paid at source from HMRC. You will need to inform your pension administrator that you are no longer UK resident and obtain an ‘NT’ tax code.
The UK State Pension is taxable in Portugal and you can also ask for this to be paid out to you gross.
UK government service pensions are always taxable in the UK e.g. civil service, armed forces. Portugal does not tax these pensions or include them as income for reporting and tax purposes.
Taking your ‘tax free cash’
An important point in relation to the taxation of pensions is with regard to the pension commencement lump sum (PCLS) and withdrawals under “pension freedoms” arrangements.
In the UK, it is possible to take a lump sum of up to 25% of the value of your defined contribution (e.g. a personal pension or SIPP) pension pot tax free. A tax-free amount is also available from a defined benefit scheme (final salary scheme) pension although this uses a different calculation method. Please note, these PCLS amounts are not tax free in Portugal. As a general planning point, we would therefore suggest utilising any PCLS entitlement prior to becoming Portuguese tax resident. However, your personal circumstances will dictate the best course of action.
We recommend that your pensions are reviewed regularly and at least on an annual basis.
This is a highly regulated and complex area that should only by undertaken by suitably qualified professionals.
If you would like to discuss your pension, are concerned about charges or performance, or would like to know if moving or adjusting your pension is the right thing for you, please contact us.
