Taking a Lump Sum from your Pension
when Resident in Spain
There are conflicting stories on how much lump sum/one off amount can you take from your pension if resident in Spain and what the tax will be. Indeed, many people with UK pensions believe it is better to take their UK pension lump sum in the UK before (grey line here if they have already moved!) they move to Spain permanently, as they will pay less tax. Firstly, even if you have a UK pension but are resident in Spain, this has to be declared in Spain. Secondly, if you finished contributing before 2007 you actually can receive MORE tax relief in Spain than in the UK (dependent upon the pension you have and how you take it).
To clarify, in the UK you can currently take a 25% tax free amount from all your private pensions and anymore would then be taxable.
If resident in Spain, you have the right to take up to 100% of your personal pensions in one go (100% in capital), to receive part in capital and part through regular payments or to receive the whole amount through regular payments. If you receive an amount in capital (a whole or a part) then you can apply for a tax reduction of 40% of the amount received for any contributions you made prior to 2007. This option can only be applied once, so, if you have more than one pension plan, you have to receive all of them in the same tax year if you want to apply this reduction. To clarify, it is the value the contributions have accumulated to today that is tax exempt, not the amount of actual contributions made back then.
From January 2007 there is no tax exemption, zero. Therefore, any contributions made from this point receive no tax exemption, however if the contribution to the pension runs before and after this date the tax exemption is calculated the same way.
If you take the amount as a regular payment you will have to pay income tax as if you have received any other general taxable income (a salary for example). In both of these cases, the amount that is taxed (with or without the 40%) is subject to the general income tax rate.
Lump Sum Pension Tax in Spain Lump Sum
Total amount of pensions: | £150,000 |
Amount to be taken in lump sum/one off: | £50,000 |
Amount tax exempt in Spain: | £20,000 |
Pension lump sum amount income taxable: | £30,000 (added to your annual income tax band) |
Now if we look at the UK example we shall see the difference:
Total amount of pensions: | £150,000 |
Amount to be taken in lump sum: | £50,000 |
Amount tax exempt in UK: | £37,500 |
Pension lump sum amount income taxable: | £13,000 (added to your annual income tax band) |
However, in the following scenario the Spain example works more in your favour:
Lump Sum Pension Tax in Spain Lump Sum
Total amount of pensions: | £100,000 |
Amount to be taken in lump sum/one off: | £100,000 |
Amount tax exempt in Spain: | £40,000 |
Pension lump sum amount income taxable: | £60,000 (added to your annual income) |
UK Example
Total amount of pensions: | £100,000 |
Amount to be taken in lump sum/one off: | £100,000 |
Amount tax exempt in Spain: | £25,000 |
Pension lump sum amount income taxable: | £75,000 (added to your annual income tax band) |