Many expats may be wondering where the best place to live is if drawing a significant cash lump sum out of a pension under new flexible access rules.
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From April, the rules allow anyone over 55 to withdraw either all their pension or smaller lump sums to spend how they wish.
The drawback is although 25% of each withdrawal is tax-free, the rest is subject to income tax.
The sting in the tail is only income of up to £42,385 is taxed at 20% or less – because the 0% tax-free personal allowance of £10,600 is included in the total.
Over £42,385, income is taxed at 40%, while high earners on £150,000 or more will pay tax at 45%.
Expat destinations
This means the over 55s have to sit down with a calculator and calendar for some careful tax-planning to minimise tax.
The thought running through many people’s minds is how their pension withdrawals will be taxed in other countries, because this could be the time to retire to that place in the sun.
Here’s a look around some of the favourite expat destinations:
- France – Expats pay around 7% income tax and an additional 7% if they register for state health services, although this can be worked around by talking to the Department of Work and Pensions in the UK before departing for a n exemption certificate
- Cyprus – Pension lump sums are tax-free and other pension payments are taxed at 5%
- Portugal – Residence schemes offer a 10-year tax exemption on overseas income
- Dubai and Abu Dhabi – Income tax is zero
- Gibraltar – Tax on pensions is 2.5%
Meanwhile, pensions experts are warning April’s overhaul of pension rules will trigger a rash of scams.
Pension scams
Instead of pension liberation fraudsters trying to circumvent pension rules, financial firms expect crooks to switch to offering risky investment scams with overstated high returns to lure unwary pensioners with cash to spend.
Tom McPhail, head of pensions research at Hargreaves Lansdown, argues unauthorised or bogus investments are a huge risk for the over 55s.
“From April, fraudsters would have to start scam pensions because they can target investors with seductive offers of ‘too good to be true’ ‘guaranteed’ investment returns,” he said.
City and financial adviser regulator the Financial Conduct Authority (FCA) is already warning about the risks of crowdfunding and buy to let funds.
The regulator believes unsophisticated investors can easily lose their money without any recourse to an ombudsman to mediate complaints or compensation if investments go wrong.
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