Pension Planning in Tenerife
We continue our series on relocating to Tenerife with a look at the various pension options available.
Retiring to the sun is commonplace nowadays for many British, with more than 1m currently receiving their state pension overseas, and this is expected to more than triple to 3.3 million by 2050. Numbers are rising rapidly, with more than 70,000 taking their pension in Spain alone, compared to 26,700 a decade ago.
British Expatriates are entitled to receive both state and personal pensions when moving to Spain and state pensions drawn in Spain will continue to rise in line with inflation. However, setting up your finances carefully could save you considerable sums. If your pension is structured properly it is possible to reduce the amount subject to tax in Spain by between 30% and 70%.
As a resident your worldwide income is subject to taxation, including pensions. Even tax-free lump sums in the UK become taxable in Spain. This situation is not as grave as it may appear and can often be circumvented.
Exchange rates
Currency fluctuations eating into a pension fund is a major concern for Britons abroad seeking a secure retirement income. As pension income is paid in sterling it will vary from month to month as exchange rates change.
Taking advantage of a specialist currency exchange, such as Currencies Direct, will minimise the damage by avoiding exorbitant exchange rates and transfer charges. High street banks charge up to £30 for a single transfer. A specialist exchange broker can allow you to fix an exchange rate for up to 24 months to guard against fluctuations. If you would like to know more, simply contact us or click reply to this email.
Moving your fund
Many people ignore their pension planning until it is too late, and believe there is little they can do to alter their situation. There is actually a great deal that can be done by means of restructuring to significantly reduce the amount of your pension income liable to tax.
The purchased annuity, (the lump sum you pay an insurance company in return for an income for life) is very favourably taxed in Spain. Opt for a private scheme where an annuity has been purchased on your behalf. If the pension is recorded on your self-assessment tax return in Spain as an annuity, it is accepted as such. This means that up to 80% of the annuity will not be liable to tax in Spain. The annuity does not need to be recorded for Wealth Tax as it has no redemption value. This presents considerable opportunities for those who understand the system and how to use it to their advantage.
Those thinking of transferring their pension scheme should seek the advice from the Pensions Advisory Service (OPAS) for exact criteria. UK law allows transfers, under certain conditions. If you are to maximise your benefits before and after retirement, it is highly advisable to seek specialist tax and investment advice on pensions.
Tax on your income
Once you are non-resident in the UK for tax purposes, personal or occupational pension income will only be liable to tax in Spain, which has a double taxation treaty with the UK. If you face a higher rate of tax in Tenerife, it may make sense to retain your UK residency and only pay tax in the UK under the double taxation agreement.
People taking early retirement and moving to Tenerife before they are eligible to draw their pension will need to pay particular attention to the 25% tax-free rule. Currently, only those people resident in the UK are able to take 25% of their pension lump sum tax free. If you are liable for tax in Spain before you start drawing your pension, you may find that this 25% is taxable as well. If you would like to know more, simply contact us or click reply to this email.
Payments from your UK State scheme
You are still entitled to your basic state pension when you retire abroad, as long as you have paid the requisite National Insurance Contributions over the years. Before you leave the UK work out your retirement income by obtaining and completing a form BR19 from the Retirement Pension Forecasting and Advice Unit (RPFA) and ask for a state pension forecast. This is available up to four months before you reach the UK pension age. The forecast you receive will tell you what your pension is at the date received and whether or not you will get more by the time you reach UK pension age. If you have already moved, and are paying local Spanish social security payments, that this forecast will not include your local contributions.
The state pension age and entitlements may vary between Spain and the UK. To obtain your UK State pension in Spain you will need to complete a claim form from the Pensions Service. This is also normally available four months before you reach the UK pensionable age. It asks you if you want to claim a UK retirement pension and for details of any periods of residence and state insurance you have in other countries. If you are living in Spain and claim a pension from that country, the UK Pension Service will pass details of your claim to the Spanish authorities who will process your pension in Spain.
The Spanish State Pension System
The Spanish pension system is based upon earnings-related schemes which cover both employees and self-employed persons. Pensions are calculated on the individual's earnings in the 15 years previous to retirement. A full pension is reached after 35 years of contributing and at the age of 65. However, this may be topped-up for low-earners after means-testing. In claiming the Spanish State Pension, previous payments in the UK towards a pension, will count towards the amount received in Spain. Each country sends details of a person's social security record to the other countries. In brief, each country adds together a persons contributions made in all countries. Then each one sees how much State pension would be allowed if all contributions had been paid into its own social security scheme, for example Spain. But each country only has to pay a part of this depending on how much was paid in to it.
A person who is some time away from retirement age can complete the form BR19 which gives a State pension forecast of the benefits available from the UK, available from the Department for Work and Pensions. Apart from identifying pension benefits you should not forget to contact all previous employers. An enormous amount of money is lost in unclaimed, forgotten pensions.
Private Pensions in Spain
Anyone who doesn't qualify for a state pension or who will receive only the minimum state pension should contribute to a supplementary or private pension fund.
There are a wide range of private pension funds in Spain (many provided by the banks) and it's also possible to continue to contribute to a personal pension plan abroad or to an offshore fund. However, contributions to foreign pension schemes aren't tax deductible in Spain, although many major European private pension companies have offices or agents in Spain.
Most experts advise that the best pension scheme for most people is one that doesn't require fixed monthly payments, but allows you to pay irregular lump sums. In Spain there is usually a minimum monthly payment, as low as 50 Euros a month and lump sum contributions are usually from 600 Euros.
A pension should be index linked to ensure that it keeps up pace with inflation. With an index linked policy, capital is tax free after contributions have been made for 15 years, with an increasing scale of tax penalties for early surrender. If you have an offshore pension, there's no tax relief but all the benefits paid are tax free. If you would like to know more, simply contact us or click reply to this email.
Property as a Pension
A popular alternative strategy in Tenerife is to purchase a property which is rented out to provide an income into retirement. Recent changes in laws which favour landlords have made this increasingly attractive and the availability of insurance products that cover loss income due to tenants not paying and damage to the property or contents have further increased the popularity of this route. Tenerife has many companies dedicated to the servicing and management of rented properties, so the owner can choose to be as uninvolved as they like. Properties can either be rented for holidays, or as long term lets, and both can be suitable for the provision of a retirement property.
The key to this strategy is in choosing the right property that will suit your target market - resident renters or holidaymakers. Community rules on the complex where you purchase must allow the type of rental you are envisaging and thought should be given to the marketability of the property and how this will be achieved. If you are considering property as a pension, then your first step should be to sit down and discuss the types of property on offer, their suitability, areas in demand and your expectations in terms of income. You can book an appointment to do so, without commitment, by contacting Tenerife Property Shop who will arrange for a specialist to discuss your needs with you and make you aware of your options.
