Making the most of your pension as an expat is something you should investigate before you leave the UK, because where and when you go can make a huge difference in the cash you receive after tax.
Although British pensions pay a tax free lump sum, depending on where you settle, this could be taxed in the country where you decide to settle as a tax resident.
Some countries have tax regimes that are much more favourable than others, so this is a decision to make before you decide to become an expat.
Is drawing down a 25% tax free lump sum in the UK a better tax option than taking the same money overseas?
Paying less tax on pensions
Taking a 25% tax-free lump sum in the UK and paying tax at 20%, 40% or 45% bandings on the balance can work out expensive.
In France, pension lump sum drawings are taxed at 14.9% – with half going to social charges that can be avoided by filing the right forms. However, if an expat delays taking the lump sum until they are tax resident, the whole pot can be taken as a single lump sum with an overall tax rate of 7.5% applied to all the money.
Taking the 25% lump sum in the UK and then becoming tax resident in the United Arab Emirates to draw the rest of the fund can see no tax charged on retirement savings.
Another expat strategy is to transfer their pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) that pays a 30% tax-free lump sum before leaving the UK.
When to take pension tax advice
In a country where tax is paid on pension income, the tax-free lump sum is extended, reducing the tax on the balance of the fund.
The vital point is looking at tax and pension finances before departing the UK.
Once the door has closed behind an expat and they become tax resident in another country, it’s too late to arrange their financial affairs in the most tax-effective way.
Expats should take professional tax advice to ensure they break ties with UK tax residency and qualify to pay tax in the country where they make their new home.
