One of the main questions we get asked by UK nationals moving abroad is the impact this will have on their pensions, so we thought a blog post would be useful. I would add that anything relating to how much you can contribute to a pension, and what you should invest in, should be discussed with a qualified IFA – we’re just commenting on the tax aspects of it.
Contributions
Firstly, living and working abroad may be a relatively more remunerative approach than remaining in the UK, and so it is often a good time to think about topping up pension contributions. The first question is whether the pension scheme that you are in actually permits contributions while you are not a UK resident, and secondly, whether making those contributions is in fact tax-efficient. Part of the trade-off with pensions is that tax relief is provided as the incentive to tie up money for 20 or 30 years, or longer, in return for there being less burden on the state in the future.
Many schemes restrict contributions to those who are UK resident, although if you remain employed by the same UK employer and are assigned to work abroad, many permit you to remain in the scheme.
Whilst living outside the UK, if you are abroad long enough to break UK tax residency, there will likely be no UK tax benefit.
The maximum annual contribution to a private pension is £60,000, and tax relief is available on contributions. The 20% basic rate can be withheld on the payment, meaning that the pension fund claims it back, whereas the rest is claimed through your annual tax return. So, for a 45% taxpayer, the net cost of adding £60,000 to your pension fund is only £33,000. For those that can’t make a contribution in a specific year, unused contributions can be carried forward for up to three years.
If you earn over £260,000, for every £2 of adjusted income over £260,000, your annual allowance for that tax year will be reduced by £1. So, if your adjusted income is over £360,000, your annual allowance will be £10,000. Above that though there will be no further reduction.
Pension income
Pension income tends to come in two parts.
UK schemes can allow a lump-sum of up to 25% of the accumulated fund to be drawn tax-free at the moment of retirement. That amount is capped at £268,274 for the 2024/25 tax year. The tax-free aspect of the lump sum is a UK-specific exemption – so, if you have moved somewhere that taxes pension income, it is possible that the lump sum is taxable there. So, if you are moving abroad to retire, it’s important to see if the lump sum should be taken before leaving the UK, even if you think you might not need it for a year or two.
After the lump sum, monthly pension payments are usually taxed as regular income. So, if you are no longer a UK tax resident, then the UK will not tax the pension, and it is up to the country in which you are tax resident to tax the pension instead. However, where the country doesn’t tax you on your worldwide income as a full resident (e.g. Thailand), it may in practice be difficult to get the UK withholding stopped.
Some countries have a low tax rate for foreign pensions – Cyprus for example only taxes them at 5%, Greece at 7%, and Malta at 15%, so those might be even more attractive retirement options than you thought.
So, pension income wouldn’t be taxable in the UK if you’re non-resident, but would likely be taxable where you are resident, unless it’s a government pension.
Government service pensions
Care should be taken with civil service or miliary pensions. Most double tax agreements make government pensions taxable in the country where they are paid from (unless the individual is a national of the other state), and so those may still be taxed in the UK. However, if there are no other UK sources of income, the full personal allowance can be applied against this income.
Living abroad temporarily
For those that are living abroad for a few years, it can be beneficial to save up excess cash, and to top up pension funds once you have become UK tax resident again. If you are a higher rate taxpayer, there may be some benefit to drip-feeding the catch-up in over 2-3 years so that all of the tax relief comes at the higher 40% or 45% rates, rather than at 20%, as that way more money makes its way into the fund for later.
Next time we’ll talk about other aspects including state pensions and inheritance tax. If you have any questions, don’t hesitate to contact Oliver or Peter to discuss your pension situation.
