If you’ve moved overseas and still have a UK pension, the tax rules for your pension can change.
Often this means the 25% tax-free cash from your pension, is locally taxable.
However, depending on where you live, you may also benefit from other tax-friendly regimes.
In this guide we’ll dive into what your options could be, and the key considerations.
How are pension withdrawals by UK residents treated for tax?
Living in the UK, once you reach age 55 (57 from 2028) you can access the funds within your defined contribution pension, like a SIPP, personal pension or workplace pension.
Final salary (defined benefit) pensions often have different retirement ages, specific to the individual scheme, so their treatment can be different.
Ordinarily you can take 25% of your pension tax-free (but this only applies to UK tax), and the remainder of your funds will be taxed as income.
What happens to your 25% Pension Commencement Lump Sum if you live outside of the UK?
Moving overseas can complicate the tax treatment of your pension.
How it’s taxed comes down to the double tax treaties between the UK, and the country you live in.
Depending on the rules, this leaves one of two possibilities:
- Your pension is taxed in the UK – this means you can still draw your pension under UK tax rules, and will still have 25% tax-free cash.
- Your pension is taxed locally – most likely your new country will not recognise the 25% tax-free payment, and this will be taxed under ordinary income tax rules where you live.
If you fall into the second category, you need to be very careful about taking large payments from your pension, if you’re taxed at a marginal rate.
Tax regimes need careful attention – A case study:
James has retired in Greece. His only income source is from his UK SIPP pension, from which he draws £35,000 per year, and his UK state pension.
Under the double tax treaty, James’ UK pension income is taxable in Greece, not the UK.
James qualifies for Greece’s Foreign Pensioners Regime, which allows him to draw his pension paying a flat tax rate of 7%.
This means the amount James withdraws from his pension, does not affect the tax treatment. He will pay 7% tax in Greece on any pension income, and on his ‘UK tax-free’ lump sum.
Susan has recently semi-retired in France, and earns €12,000 from teaching English. She has a UK pension worth €600,000.
She needs €40,000 per year to live off, and is considering taking €150,000 as a 25% lump sum payment from her pension.
Under the double tax treaty her pension will be taxed in France not the UK.
However unlike Greece, France has a marginal tax rate – this means the more income you have, the more tax you pay.
If Susan takes €150,000 from her pension in one go, she could pay taxes up to a rate of 41% on the withdrawal.
However if Susan only withdraws the €29,000 she needs to spend each year, her taxes could be as low as 11%.
What if there isn’t a double tax treaty between the UK and the country I live in?
If there’s no double tax treaty between the UK and your country of residence that covers pensions, you may be taxed in both countries at the same time.
For practical purposes, some countries may offer a tax credit, towards tax already withheld overseas – but this isn’t always the case.
If a double tax treaty doesn’t cover your pension, I recommend consulting a local tax professional to find out more.
Are there any countries with beneficial tax regimes for UK pensions?
Yes. Whilst the 25% pension tax-free cash is rarely recognised overseas, many countries have special tax regimes for pensions.
Or if double tax treaties favour your country of residence, the tax due may be at a lower rate, or you may able to pay no tax at all.
Cyprus – 5% Flat tax rate to pension withdrawals over the €3,420.
France – 10% Flat Tax can be applied if pensions are withdrawn as a single lump sum. If you’ve already accessed your pension, this option may not be available to you.
Greece – 7% Flat tax rate for people qualifying under the Foreign Pensions Regime.
Hungary – Pensions are not subject to tax in Hungary.
Italy – 7% Flat tax rate for residents of certain areas of Southern Italy (Abruzzo, Calabria, Campania, Molise, Apulia, Sardinia and Sicily regions), that have less than 20,000 inhabitants.
Malaysia & Thailand – Foreign source income is currently exempt from tax in Malaysia and Thailand, unless it is remitted to the country.
UAE, Qatar, Bahrain, Kuwait & Saudi Arabia – Double tax treaties can allow for UK pensions to be withdrawn free of tax.
What about tax paperwork for the UK?
If your pension is supposed to be taxed locally, instead of in the UK, it’s important to send HMRC the correct paperwork.
Otherwise, you’ll usually have UK taxes deducted at source from your pension, whilst also owing taxes locally.
This can lead to having a lower after-tax income than you expected, and having to go through a lengthy process to reclaim overpaid UK taxes.
To make sure this doesn’t happen you need to send a DT-Individual from to HMRC. But this can only be done, once your pension is already in payment.
To avoid unnecessary issues, it often makes sense to withdraw a small amount from your pension, to create a tax charge, sometime before you’re reliant on the funds.
You can then send the paperwork to HMRC who will refund any overpaid tax, and issue an NT Tax Code (no tax) to your pension provider for future payments.
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