Extracting pension pots: the Portugal plan

jamesd

A piece in the FT today - (see MoneyWeek version) (or in FT A place in the sun and a tax-free pension (or direct link) - observed that there is a 0% income tax rate on pension income in Portugal and that it has a tax treaty with the UK. So move to Portugal to establish residence then take out 100% of your pension pot at your 0% marginal income tax rate for pension income. It mentioned two years residence though I'm puzzled about two years, wouldn't one suffice?

Any other useful jurisdictions with low rates on pension income and easy mobility for UK retires?

For me this might compete with the VCT strategy, since it locks up the money for less time than VCTs. it does have the disadvantage of not getting the 10% VCT tax relief gain on the basic rate income that would apply in the UK, though, so it's not as good for those who don't have a time limit of some sort and who have plenty of basic rate income tax range to use.

kidmugsy

Would Portugal tax the income in your ISAs? The capital gains?

jamesd

I don't know. Probably not very significant for the short term pension extraction approach.

Aegis

jamesd wrote: »

A piece in the FT today observed that there is a 0% income tax rate on pension income in Portugal and that it has a tax treaty with the UK. So move to Portugal to establish residence then take out 100% of your pension pot at your 0% marginal income tax rate for pension income. It mentioned two years residence though I'm puzzled about two years, wouldn't one suffice?

Any other useful jurisdictions with low rates on pension income and easy mobility for UK retires?

For me this might compete with the VCT strategy, since it locks up the money for less time than VCTs. it does have the disadvantage of not getting the 10% VCT tax relief gain on the basic rate income that would apply in the UK, though, so it's not as good for those who don't have a time limit of some sort and who have plenty of basic rate income tax range to use.

There are rules in place to prevent this. Temporary periods of UK non-residency combined with significant withdrawals from a flexi-access pot may well lead to a very large tax bill on return to the UK. Treat this strategy with great care!

chucknorris

jamesd wrote: »

It mentioned two years residence though I'm puzzled about two years, wouldn't one suffice?

I thought that you had to be away for 5 years to establish non residency of the UK for tax purposes?

Aegis

chucknorris wrote: »

I thought that you had to be away for 5 years to establish non residency of the UK for tax purposes?

It depends how many significant ties you have to the UK. It is feasible to live abroad for many years and still retain resident status, while it is also feasibly possible to lose residency in one year. The new rules are horrendously complicated and there's no easy answer!

chucknorris

Aegis wrote: »

It depends how many significant ties you have to the UK. It is feasible to live abroad for many years and still retain resident status, while it is also feasibly possible to lose residency in one year. The new rules are horrendously complicated and there's no easy answer!

It was my understanding that you used to be able to move to the Isle of Man and avoid capital gains tax, but you were not eligible until 5 years had passed, was that only applicable to CGT? I realise that that loophole has now (or will shortly be) closed, so it isn't significant any more, and we didn't investigate the situation fully for that reason.

jamesd

Aegis wrote: »

There are rules in place to prevent this. Temporary periods of UK non-residency combined with significant withdrawals from a flexi-access pot may well lead to a very large tax bill on return to the UK. Treat this strategy with great care!

I'd welcome pointers to such rules, notably in relation to flexi-access drawdown. The statutory Residence test seems to cover much of it but no mention that I've found so far for flexi-access drawdown, though I think it's inconceivable that the law would not be changed to include it.

For me this might be an interesting approach if I decide to retire outside the UK, since it would permit releasing the pension pot and then investing the money as required by immigration law in various countries. All part of retirement planning, though, even if the money has to be moved outside a pension to do it. If staying in the UK VCTs have tax advantages over this.

chucknorris wrote: »

I thought that you had to be away for 5 years to establish non residency of the UK for tax purposes?

Just being outside the UK for a year (less 16 or 46 days or 91 days depending on previous years) is enough for normal non-residence.

Five complete years, not necessarily tax years, would be sufficient to prevent the temporary non-residence rules in RDR3 guidance notes from applying (page 70).

From page 73-74 that appears to explain why the FT story mentioned two years, since the temporary non-residence rules would count some foreign income and gains as UK gains during the tax year of return. The pension part of that refers specifically to flexible drawdown, not flexi-access drawdown and EIM74050 that it references for more detail is about flexible drawdown. However the document was prepared in June 2014 and even though that's after the 2014 Budget it may not have included something that does apply to flexi-access drawdown. the key part of EIM74050 is:

"To prevent the possibility of someone avoiding tax by becoming temporarily non-resident for one full tax year or more and in that period taking flexible drawdown from a registered pension scheme or from an overseas pension scheme, FA 2011 introduced sections 576A and 579CA ITEPA 2003. From 6 April 2011, and subject to certain conditions, flexible drawdown paid whilst an individual is temporarily non-resident in the UK is treated as pension income arising to the individual in the tax year they resume residence in the UK"

In the Taxation of Pensions Act 2014 Explanatory Notes I see in paragraph 103 mention of a £100,000 threshold for the rules to apply to pension income.

It appears that if the plan is to return to the UK within five years the money needs to be taken out in the tax year before the tax year of return to the UK, unless that £100,000 is relevant and applies, I haven't checked yet.

The £100,000 could reduce the time during which money is tied up. Perhaps using VCTs for early years than going abroad for later years so all synchronises five years after the first VCT use without requiring additional VCT years.

Thrugelmir

I have no desire to move to Portugal just to save tax. As there's far more to life than that alone.

jamesd

Some people might not regard Portugal as undesirable, or may regard it as OK for a couple of years as a stepping stone to somewhere more desirable. There are other low income tax jurisdictions around so it's of broader application.

chucknorris, the Statutory Residence Test lists CGT as one of the things it covers.

chucknorris

Thrugelmir wrote: »

I have no desire to move to Portugal just to save tax. As there's far more to life than that alone.

We plan to eventually spend up to my 5 months (but more likely only 3 months) per annum over there during the winter/autumn anyway, so it might be worth us considering staying on if there was a significant advantage to be had.

But as kidmugsy says how would that affect ISA's (we would have about £400k in ISA's by then), not to mention rental income (approx. £125k).