Attractive tax legislation on pension lump sums offered in popular retirement areas
The new pension flexibilities coming into effect in the UK on 6th April will also benefit expatriates residing in some of the most popular retirement destinations. This change in legislation will, amongst other things, allow the over 55s to withdraw their entire pension pot, with 25 per cent being a tax free lump sum, or alternatively individuals can withdraw smaller amounts with 25 per cent tax free and the remainder taxed at their marginal rate.
It’s important for expatriates and individuals considering an overseas retirement to know how their pension pots will fare in a different country.
For instance, expats residing in France will be taxed using the French income tax rate with a 10 per cent reduction. Drawdown of pension lump sums are bound by 7.1 per cent income tax and 7.5 per cent social charges, which people holding an S1 certificate of health care form are exempt from.
Those who choose Cyprus to retire will benefit from a tax-free withdrawal of their UK pension in a lump sum, and additional yearly pension income will not be taxed any higher than a rate of five per cent.
Whereas retirees in Portugal can enjoy the Non-Habitually Resident regime, providing they have not been tax resident in the country for the past five years, in order to benefit from tax-free foreign income.
Whilst there are, according to proponents of the new flexibilities, a whole array of advantages available to expatriates, there are also a number of risks associated with this change of legislation.
Speaking at the end of last year, Nigel Green, founder and CEO of deVere Group, one of the world’s largest independent financial advisory organisations, said: “With new freedoms come new responsibilities and these must be highlighted.
“There are real concerns that some individuals might not necessarily have the required financial literacy to always make the most informed decisions. Mistakes with retirement planning can be extremely costly on many levels and often difficult to overcome.”
Of course, the main objective of a pension is to provide a source of income to see us through old age. However by allowing early withdrawals, there is a very real risk that the pot could run out, jeopardising living standards in later life.
Also, it must be remembered that whilst 25 per cent will be tax-free in every withdrawal, the rest is subject to income tax at the individual’s highest marginal tax rate. This means people could face a tax of 45 per cent for the privilege of early access to their pension pots.
As such, consulting with an independent financial adviser is crucial so as to circumvent the potentially devastating consequences of early access to retirement funds.