Looking to move to Europe for retirement?
You might be shocked to find that transferring your pension could cost you 25% in taxes simply for relocating. This sneaky tax can take a huge chunk out of your retirement savings, and many retirees don’t realise this hidden charge until it’s too late.
The good news is that you don’t have to fall victim to this tax trap. We will explain how the 25% tax works, why it applies, and, most importantly, how you can avoid it.
In addition to the 25% charge, a 40% payment charge may apply to unauthorised payments, and a further 15% if the total unauthorised payments in a 12-month period are more than 25% of the fund value.
Why the 25% Tax on Pension Pots Exists
The 25% charge on pension pots for expats moving to certain European countries is designed to protect the UK tax system and discourage individuals from transferring their pensions to jurisdictions with more favourable tax laws. It ensures that UK pension holders still pay taxes fairly, even if they choose to live abroad.
However, not everyone is affected. The tax primarily applies if you’re transferring your pension into schemes outside the UK that lack formal agreements with the UK government.
So, if you plan to relocate to a European country without such an agreement, this tax could hurt your savings in several ways:
Big financial blow: Losing a quarter of your pension can set back your retirement goals.
Irreversible loss: Once the tax is paid, it’s gone for good.
Complex rules: Each country has its own approach to pension transfers. Without expert advice, you might unknowingly trigger this penalty.
How to Avoid or Minimise the 25% Tax Charge
Fortunately, several strategies can help you avoid or reduce the tax penalty when moving your pension pot abroad.
Check Tax Treaties
Some European countries have agreements with the UK that allow tax-free pension transfers. Places like Portugal, Malta, and Switzerland often offer more favourable terms. Work with a tax adviser who understands international laws to see if your destination is on the list of “tax-friendly” countries.
Explore a QROPS Transfer
A Qualifying Recognised Overseas Pension Scheme (QROPS) allows you to transfer your pension abroad without the tax penalty—but only if the scheme meets UK regulations. Make sure to choose a scheme that complies fully with UK rules and suits your financial goals.
Timing Your Pension Transfer
Transferring your pension before moving abroad can sometimes exempt you from the tax, depending on your destination. Transferring afterwards might make you liable. A tax adviser can help you figure out the best timing for your situation.
Consider Currency Risks
If you leave your pension in pounds, currency exchange rates can impact its value. Consider whether converting it to local currency is worth the risk.
Common Mistakes to Avoid
When planning your pension transfer, it’s easy to make mistakes that could cost you. Don’t make these common errors when transferring your pension:
Ignoring tax agreements: Always verify if your destination has an agreement with the UK.
Choosing the wrong QROPS: Only use schemes that comply with UK regulations.
Waiting too long: Delaying your transfer could lead to higher taxes. Act early to save money and stress.
Protect Your Pension—and Your Future
Moving to Europe should be about starting a new exciting chapter in your life - not losing a chunk of your savings to unexpected taxes. With careful tax-planning, you can ensure your savings remain intact when you move abroad.
If you find this all to complex and time consuming consider getting in touch with our team here at Klarity Tax for an initial free consultation to learn how to preserve your retirement savings and make the very best decisions to protect your future income.
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