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How UK pension income is taxed in Spain
By Paul Montague, Partner, Blevins Franks
928 433 411 | canaryisles@blevinsfranks.com | www.blevinsfranks.com
If you’ve chosen to retire in Spain, it’s essential to understand how your UK pensions will be taxed in Spain. The tax treatment will depend on the type of pensions you have, so knowing the rules in advance will help you plan effectively, avoid unexpected liabilities, and choose the most tax-efficient option to suit your goals.
You’ve diligently saved to be able to enjoy your dream retirement. Now that time has come, it’s important to thoroughly evaluate all your pension options as a UK national living in Spain.
Carefully consider the advantages and disadvantages of each option, as well as the tax implications, to determine which best aligns with your personal situation, objectives and risk appetite. Retiring in Spain means dealing with two different tax systems, and since this cross-border element can be a minefield, you need specialist integrated advice covering pensions, and Spanish and UK taxation.
Under the UK/Spain double tax treaty, most UK pension income (including lump sums) received by a resident of Spain is liable for Spanish taxation and no longer subject to UK tax. Government service pensions, however, are a key exception.
Government service pensions
Pension income arising from UK government service remains fully taxable in the UK, under the usual income tax rates and with the personal allowance.
It is not directly taxed in Spain, but although you don’t pay tax twice, you must still list it in your annual tax return. This enables the pension income to be included when calculating the Spanish tax due on your other annual income. This could push you into higher tax bands and increase your tax bill.
Government service pensions are civil service or local authority pensions. This can include teachers, police and fire brigade pensions, though not in all cases. NHS pensions don’t necessarily count as government service.
UK state and occupational pensions
UK state and occupational pensions are taxable only in Spain. Your pension income is treated as ‘general income’ and is subject to the scale rates of income tax, which range from 18.5% for income up to €3,010 to 50.5% for income over €300,000 in the Canary Islands.
The state retirement pension is always paid gross in the UK, so you simply declare and pay tax on it in your Spanish tax return.
When it comes to your other pension income, however, the UK will continue to deduct tax at source until it is satisfied that you are resident in Spain and paying Spanish tax on this income. You can request a tax residency certificate from your Spanish tax office and send it to HM Revenue & Customs.
UK private pensions
The taxation of UK private pensions in Spain is much more complicated. It can give rise to interesting anomalies because of the confusion over the meaning of “purchased annuity” in Spain.
Given the complexity and ambiguity of the subject, we recommend that you take highly personalised and specialist advice from an adviser with thorough knowledge and experience in both UK pensions and Spanish taxation.
Pension lump sums
This is one tax trap many Britons moving to Spain fall into. The UK rules allow you to take a 25% ‘pension commencement lump sum’ tax-free. But if you take this lump sum after becoming resident in Spain, it is taxed here in the same way as other pension income; there is no tax-free element.
QROPS
Income from Qualifying Recognised Overseas Pensions Schemes (QROPS) is taxed in the same way as occupational pensions, at the scale rates of general income tax.
While a QROPS can provide British expatriates with advantages over a UK pension fund, you need to be aware that Spain will apply a detrimental tax charge if you make the transfer after becoming a tax resident of Spain. In summary, where a non-EU/EEA pension fund is transferred into an EEA pension scheme, Spain will apply a personal income tax charge on the whole fund value.
If moving to QROPS is not feasible for you, take regulated advice on what other options are available for your pension and which is most advantageous for you. For example, consolidating several different pension funds into a single SIPP could work well. You can set it up with the investment approach aligned to your attitude for risk, potentially improve your benefits, and make life easier too.
Your other retirement savings
In Spain, investment income is taxed as ‘savings income’ at progressive rates from 19% to 28%.
Life assurance contracts, where you hold your choice of investments within its ‘wrapper’, can provide significant tax advantages in Spain. Take wealth management advice to establish if these arrangements would be suitable for your objectives and circumstances, and how you could potentially benefit from them. Some British expatriates opt to cash in their pension to reinvest the proceeds in these arrangements, but first, carefully evaluate if this is a suitable option for you.
Reviewing your pension arrangements
Whether you are still planning your move to Spain or already live here, you need to review your retirement savings and establish what is best for your current and future circumstances. It’s important to weigh the pros and cons of all your options, taking your personal situation and goals into account, to establish which is most suitable for you. Then regularly review your objectives, which could mean changing your investment profile, reassessing your risk tolerance, or developing an alternative strategy that embraces your overall financial situation.
UK pensions are complex, with frequent reforms, and making a wrong decision could impact your retirement security. Taking professional and regulated advice is essential. UK-based advisers rarely have in-depth understanding of Spanish taxation and may not be able to keep up to date and react quickly where needed. Also, most UK advisers are not regulated to give advice to EU residents.
You, therefore, ideally need personalised advice from a Spain-based adviser who can provide integrated advice covering pensions, investing, and cross-border tax and estate planning, covering both Spain and the UK.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
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