After years, or even decades, of building up your pension and investments, you eventually reach the point where you want to start drawing from these savings. This marks the transition from the accumulation phase of your financial life to the decumulation phase.

Navigating this phase effectively can make a significant difference to your financial well-being and your legacy. Below, we outline five key rules to help ensure that your withdrawals are both tax-efficient and investment-savvy.

1. Only withdraw your lump sum if necessary
Under UK pension rules, you can withdraw 25% of your pension fund tax-free. This is known as the “Pension Commencement Lump Sum.” Whilst this payment is tax free for UK residents, those living in Portugal must report and pay tax (unless 0% NHR) on this sum.

If you have a specific plan for this money, such as paying off a mortgage or clearing other debts, withdrawing the lump sum may be a wise choice. However, if you don’t have an immediate need for it, it might be better to leave the funds in your pension, where they can continue growing tax-free.

Another key consideration is inheritance tax (IHT). Currently, pension funds are exempt from UK IHT. By taking money out of your pension, you may unintentionally move it into your taxable estate. This is fine if you plan to spend the funds, but it could be inefficient if you are simply holding on to or reinvesting the cash.

2. Dynamic withdrawals
When withdrawing from your investments, striking the right balance between enjoying your lifestyle now and securing your financial future is crucial. Some people prefer to prioritize their current lifestyle, while others aim to leave a larger estate for their beneficiaries.

Market conditions should also influence your decisions. For instance, if stock markets have risen, it might be wise to take profits. Conversely, during market downturns, you might choose to reduce your withdrawals until conditions improve.

Cashflow planning can also help you plan for the future. Forecasting allows you to balance your spending today with the need to preserve funds for the future. It also allows you to adjust for variables like inflation, market performance, and unexpected expenses, helping to prevent the risk of outliving your savings while maintaining your desired lifestyle.

3. Plan for the long haul
Many people underestimate their life expectancy when planning for retirement. A couple in their mid-60s today has a good chance of living well into their 80s or even beyond 100. This means it is important to plan (and think in) decades rather than just a few years.

This increased longevity has important implications for how one should invest. In the past when life expectancy was much shorter, retirees often moved their portfolios into lower-risk assets like bonds or cash but with people living longer, this approach is no longer be suitable.

To ensure long-term growth, it’s essential to maintain a healthy allocation of growth-oriented assets such as shares, while balancing this with safer investments like fixed income and cash. The exact mix will depend on your risk tolerance and other income sources.

4. Review Your Plan Regularly
Global markets and tax laws are constantly changing, which is why it is crucial to review your portfolio regularly against this ever-changing backdrop.

This includes keeping up with changes in tax laws across multiple jurisdictions, for example UK pensions has seen huge changes recently and further changes are expected in the next UK Budget. Adapting to new rules in both the UK and Portugal, can help you avoid costly mistakes and optimise your financial strategy.

5. Control Fees and Taxes
While you can not control market movements, you can manage two major eroders of wealth: taxes and fees.

People often end up paying tax in the wrong country or, worse, in multiple countries at once. Additionally, many fail to take advantage of the tax reliefs and allowances available to them.

Regularly reviewing your financial arrangements can help ensure that your investments and pensions are tax-efficient and that you are not overpaying in fees.

Final word
By following these five rules, you can better navigate the transition to decumulation, ensuring that your hard-earned savings continue to work for you in a tax-efficient and financially secure way.

LONDON, THURSDAY 17TH OCTOBER

Pestana Chelsea Bridge Hotel
354 Queenstown Road London SW11 8AE

Escape the ordinary, embrace the extraordinary, and discover why Portugal is the perfect present for your future.

On Thursday 17th of October 2024, our Moving to Portugal Show & Seminars will return to central London. This one day event, which opens at 10.30am and closes at 7.30pm, mixes live seminar presentations and expert panel discussions with carefully selected exhibitors, who can give you all the information you need on how to make your business or lifestyle move to Portugal a success from day one.

You can learn all about the different visa, residency and tax rules, and how daily life works in terms of jobs, schools, health and the cost of living. You can also learn about investing in Portugal, from the managers of some of the country’s top investment funds who will explain their investment strategies and why some funds are eligible for Portugal’s well known ‘residency by investment’ Golden Visa programme.

If it’s a quiet life you want, come and find out why retiring to Portugal makes good financial sense.

Come and meet our very own team of experts who live and work in Portugal – this means they understand exactly what its like to move to another country. Are team will be presenting and sharing valuable insights on maximising pensions, investments, and estate planning in Portugal.

We are also encouraging the in-person visitors on the day to book one to one meetings in advance with our advisers, or to book a Zoom call or video call with them if you prefer not to attend in person.

Contact our team direct to book your appointment: portugal@spectrum-ifa.com

GOOD NEWS !

Many expats who were eligible for NHR status didn’t apply—either because they weren’t aware of the program or received incorrect advice—resulting in unnecessary tax payments.

Following a recent ruling from Portugal’s Supreme Administration Court, it may still be possible to apply for Non-Habitual Residence (NHR) status – even if you missed the initial deadline.

The detail
To qualify for NHR status, one of the key requirements is that you must not have been a tax resident in Portugal for the five years preceding your arrival and application.

Traditionally, the deadline for NHR applications is 31st March in the year following the start of your tax residency e.g. if you became resident on 1st June 2017, the application deadline was 31st March 2018.

As a result of this ruling, if you were eligible at the time of arrival in Portugal you may still apply for NHR, although the NHR period will start from your original residency date i.e. if you became tax resident on 1st June 2017, the end date of NHR will be 2026.

NHR – a taxation no brainer
To recap, the benefits of NHR lasts 10 years and offers:

• 0% tax on foreign dividends and interest
• 0% tax on capital gains from non-Portuguese property
• 10% income tax on foreign pensions
• 20% tax on income from “high-value” professional activities

These benefits make NHR one of the most attractive tax regimes in Europe. If you’re eligible under this new ruling, it is highly advisable to consult with your lawyer or accountant to review your status and potentially apply.

If you need any assistance in evaluating your investment and pension planning in light of NHR, we would be pleased to assist.

In previous articles, we explored Qualifying Non-UK Pensions and Portuguese-compliant investment bonds as potential investment strategies. This week, we turn our attention to another important financial planning tool—trusts. In this article, we will discuss the advantages and drawbacks of using trust structures to manage investments.

Please note that the following analysis assumes UK domicile and it is important to understand that you can have a UK domicile as a Portuguese tax resident.

What is a trust?
A trust is a legal arrangement in which ownership of assets—such as cash, property, or investments—is transferred from one individual (the settlor) to trustees. These trustees then become the legal owners of the assets, managing them for the benefit of the settlor’s chosen beneficiaries.

A typical example might involve parents or grandparents aiming to reduce the size of their estate for inheritance tax (IHT) purposes. However, they may not feel comfortable gifting directly at this stage due to, for example, the beneficiaries being minors or not being mature enough to receive gifts direct. So the trust allows them to gift the assets now, but retain control over the timing and distribution of assets to the beneficiaries.

Trusts may also be used to safeguard assets for vulnerable beneficiaries or protect family wealth in the event of divorce.
Trusts can be created during a person’s lifetime or incorporated into a will.

Benefits
One of the key advantages of a trust is the control it offers. The settlor can dictate when and how assets are distributed to beneficiaries, which is particularly useful if the beneficiaries are not ready to manage large sums of money.

In addition to control, trusts offer substantial IHT benefits. Once assets are placed into trust, they are removed from the settlor’s estate, potentially resulting in a 40% tax saving—provided the settlor survives for seven years following the gift. This can significantly reduce the tax burden on beneficiaries when the settlor passes away.

Another practical benefit is that assets held in trust bypass probate, which can speed up the process of settling an estate and distributing assets to beneficiaries.

When is a trust most effective?
A trust is most effective when the settlor does not need access to the assets or income from the trust.

If the settlor or spouse retains any benefit from the assets within the trust, this is treated as a “gift with reservation of benefit” (GWR or GROB) meaning that the value they thought they had given away actually remains in their estate for tax purposes.

We commonly see parents gifting their main home to their children, or to a trust though which their children can benefit, thinking that this gift removes the value of their home from their estate on the basis they are no longer the legal owners. However, by continuing to live in the property they have fallen foul of the GWR rules and have defeated the purpose of the planning.

Tax implications
While trusts can deliver IHT savings and offer control over asset distribution, they can be quite costly from a tax perspective.

Upon creating a trust, the settlor must pay a 20% IHT charge on any amount exceeding the available nil-rate band (£325,000 for the 2024/25 tax year). For example, a £1 million gift into trust would result in a tax bill of £135,000 on the excess £675,000.
If the gift involves non-cash assets, capital gains tax (CGT) may apply, as the transfer is treated as a disposal.

Lastly, trusts are effectively additional rate taxpayers in the UK. They therefore pay income and capital gains tax at the highest rates on any income received and gains made annually. The trust also pays an inheritance tax charge of 6% every 10 years on the trust value.

Trusts and Portuguese Law
As a civil law jurisdiction, Portugal does not recognise trusts legally but it does tax income deriving from trusts and this applies irrespective of whether the trust has increased in value or not i.e. any distributions would be taxed at 28%, or at 35% if coming from a blacklisted jurisdiction, on both capital and gains.

Alternatives to trusts
If trusts are expensive from a tax perspective, not to mention the costs of appointing and running trustees, what at the alternatives?

‘Bare’ trusts
These are simpler than discretionary trusts and do not carry the 20% entry or 6% periodic tax charges. However, bare trusts have a significant limitation: once the beneficiary turns 18, they automatically gain full access to the assets, which may not be suitable for every family.

Contract based solutions
There are financial products that offer similar benefits to trusts—such as “gifting with control”—without the hefty tax costs associated with trusts. These may be worth exploring as an alternative.

Conclusion
There is no “right” or “wrong” in relation to trust planning – the suitability of different trust options will really depend on each family’s position and objectives.

For example, if you need access to either the capital or income from the underlying assets, trusts may not be appropriate. Or if you are uncomfortable gifting directly to your beneficiaries now, then a trust may be a redundant step in the financial planning process, and it may be better to consider various ways and allowances for making direct gits to your beneficiaries.

We would also advise a word of caution against companies cold-calling offering trust solutions to “Labour proof” your finances, and to always ensure you use caution and do your due diligence.

A path to lower taxes?

In an increasingly complex financial landscape, Portuguese tax residents are constantly on the lookout for investment strategies that offer both flexibility and tax efficiency. One of the most tax certain options for investors looking to reduce their tax burden is the Portuguese Compliant Investment Bonds (PCIB).

What is a PCIB?
PCIBs are a tax efficient form of investment that work particularly well for residents of Portugal. They also offer enhanced tax advantages for those who may return to the UK in the future.

Despite the somewhat misleading name, these “bonds” are not traditional loans to corporations or governments. Instead, a PCIB operates as a tax-efficient “wrapper,” akin to the UK’s Individual Savings Accounts (ISAs), offering investors a protective layer against immediate tax obligations.

How they function
The actual performance and growth of the PCIB is driven by what you put into the wrapper and in this respect, it is very flexible.

The PCIB allows you to invest in a wide choice of investments without the tax drag of ongoing capital gains or income tax – this is referred to as “gross roll up”. This means that within the PCIB, investments can accumulate wealth more rapidly than if they were subject to annual taxation outside of this structure.

However, in 2019, the Portuguese government introduced a concession allowing individuals to bypass this tax by investing the proceeds from a property sale into an approved investment or pension structure, such as a PCIB. There are however certain qualifying conditions, the main ones being age 65+ or retired, the property being sold must be your main residence, and it has to be held by you personally (not through a company).

Other benefits
PCIBs offer a range of benefits beyond property-related tax relief:

• Lower Effective Tax Rates: When funds are withdrawn, only the growth portion is subject to tax. Additional tax reductions apply after five and eight years.
• Post-NHR Flexibility: The favourable tax treatment of PCIBs is available to both Non-Habitual Residents (NHR) and regular Portuguese taxpayers, making them a versatile tool for long-term financial planning.
• Control Over Tax Timing: PCIB holders can choose when to withdraw funds, enabling them to synchronize taxable events with periods of lower income.
• Avoid the 53%+ capital gains tax trap – investments held for less than 12 months typically attract income tax rates of up to 53%. However, within a PCIB, buying and selling can occur without triggering immediate tax liabilities.
• Investment flexibility and diversification – PCIBs accommodate a variety of currencies, asset classes, and investment strategies, offering a broad scope for portfolio diversification.
• Simplified Tax Reporting: Tax and reporting obligations are only triggered when a withdrawal is made therefore simplifying the reporting process for bond holders.
• International Portability: Recognised in many jurisdictions, PCIBs offer flexibility for those who may relocate, potentially eliminating the need to liquidate investments to start planning again. They are particularly tax efficient for UK residents allowing investors to potentially washout gains made whilst overseas.
• Succession planning – investment bonds allow flexible and certain transfer of wealth to beneficiaries. This may not be possible with other investment types and the default “forced heirship” provisions under Portuguese law.
• Inheritance tax savings – with the correct planning, holding wealth in an investment bond could mitigate UK inheritance for British domiciles and strengthen a non-UK domicile claim.
• Estate administration – In the event of the bondholder’s death, the distribution of assets to beneficiaries can occur without the need for a lengthy probate process.

The Importance of Professional Guidance
Given the intricacies involved in setting up a PCIB, it is essential to seek expert advice. Properly structuring the investment to align with individual and family needs is crucial to maximising its benefits and ensuring compliance with applicable laws.

No matter where you stand on the political spectrum, it seems there may be difficult times ahead regarding the UK’s finances.

With the upcoming budget on 30th October, tax increases seem all but certain.

The dilemma for the government is that, with Labour’s pledge not to raise income tax, national insurance, VAT or corporation tax, how will they look to ‘plug the hole’?The dilemma for the government is that, with Labour’s pledge not to raise income tax, national insurance, VAT or corporation tax, how will they look to ‘plug the hole’?

Here are some key areas to consider, the implications of which will be determined by your tax residency status, UK or Portugal.

Capital Gains Tax (CGT)
Currently, non-property gains are taxed at 10% for basic-rate taxpayers and 20% for higher/additional rate taxpayers, and property gains are taxed at 18% or 28%. One potential change could see CGT rates aligned with UK income tax rates i.e. 20%, 40% or 45%.

Whilst this will not have an impact to gains made by expatriates on non-property related investments, as the gain is only taxable in the country of resident (28% in Portugal), it would impact gains made on property held by non-UK residents.
UK property is always primarily taxable in the UK, irrespective of where the owner is resident. For Portuguese tax resident selling UK property, tax is also due in Portugal on the gain with a credit for any tax paid in the UK (unless a Non-Habitual Resident, where the gain is taxed at 0% in Portugal).

Pension Schemes
Changes to pensions would impact both UK and Portuguese tax residents. Currently, pension schemes are exempt from inheritance tax (IHT), but this benefit could be reduced or eliminated. Additionally, there may be changes to tax relief on pension contributions, so now could be a good time to maximise contributions and unused allowances while full relief is still available.

Keir Starmer has confirmed that there are no plans to reintroduce the lifetime allowance (LTA), but he has pledged a pension review.

This could see the tax-free Lump Sum Allowance (LSA) reduced or removed, so those needing this cash could benefit from withdrawing it sooner rather than later.

There may also be a reduction in the tax relief on pension contributions for high earners, reducing the relief from 45% to 20%/25%.

Whilst currently, pensions are outside the scope of UK inheritance tax, there has also been talk of removing this benefit. So those with large pension pots should keep an eye on these changes.

Early planning is crucial with IHT, such as starting the seven-year gifting period and taking advantage of the annual available reliefs.

For those looking to adopt a domicile of choice in Portugal, it would be beneficial to reduce your UK-based assets, as they remain subject to UK IHT, even if you are domiciled abroad.

Other changes
Possible further changes include reducing the generosity of agricultural and business property reliefs, and “wealth tax” targeting high-net-worth individuals e.g. through increased taxes on property holding, shares, dividends and luxury goods.

Final word
It is expected that any announced changes will come into effect from 6th April 2025, so whilst this may seem like a long planning window, planning early will be very important to ensure you take advantage of any remining opportunities and restructure in time.

With over 35 years’ experience, Debrah Broadfield and Mark Quinn are Tax Advisers & Chartered Financial Planners specialising in cross-border advice for expatriates. Contact us at: +351 289 355 316 or portugal@spectrum-ifa.com