Tax on pensions can take a large chunk out of already stretched retirement income, but one country in Europe has the welcome mat out with a promise of a decade tax free for wealthy pensioners.
While other retirees sit at home in the UK worrying about paying the bills and handing a large percentage of their hard-saved pension funds to the tax man, others can relax in the sun without too much of a care.
Portugal is a short hop by plane from Britain, but could be a world away with warmer weather, sandy beaches, acres of golf courses and a relaxed lifestyle.
One of the country’s best kept secrets is not the nooks and crannies of the unspoilt Algarve, but an open invitation for the wealthy to come and set up a new home as expats with their families.
Generous tax breaks
Some smarter pensioners have realised that the offer of a new home coupled with Chancellor George Osborne’s generous flexible pension benefits can add up to a massive tax saving.
Under the non-habitual residence scheme, British expats can retire to Portugal and draw down their pension cash as a 100% tax-free lump sum or in smaller amounts.
The move sounds too good to be true, but it really does work, provided you are a high net worth individual, which generally means you have net assets of £600,000 or more that are clear of all mortgages and other liabilities.
Pension income for these wealthy individuals is then exempt from tax in Portugal for 10 consecutive years, as long as they have not lived in the country during the preceding five years.
No tax on pensions
As Britain has a double taxation treaty with Portugal, any flexible access pension cash taken in the UK and remitted to the country is free of tax in the UK. The agreement allows any tax due to be settled in Portugal – and as pension income is exempt from tax, there’s nothing to pay there either.
Providing all pension cash is drawn down during the year exempt period, no tax is due on the fund.
“The deal comes with reduced rate income tax on income earned in Portugal or from other assets,” said a spokesman for accountancy firm Pwc, which has produced a guide to the non-habitual residence scheme.
“The scheme really does make Portugal a top tax choice for wealthy retirees from Britain.”