If you’ve chosen to retire in Spain, it’s essential to understand how your UK pensions will be taxed in Spain. The tax treatment will depend on the type of pensions you have, so knowing the rules in advance will help you plan effectively, avoid unexpected liabilities, and choose the most tax-efficient option to suit your goals.
You’ve diligently saved to be able to enjoy your dream retirement. Now that that time has come, it’s important to thoroughly evaluate all your pension options as a UK national living in Spain.
Carefully consider the advantages and disadvantages of each option, and the tax implications, to determine which best aligns with your personal situation, objectives and risk appetite. Retiring in Spain means dealing with two different tax systems, and since this cross-border element can be a minefield, you need specialist, integrated advice covering pensions and Spanish and UK taxation.
Under the UK/Spain double tax treaty, most UK pension income (including lump sums) received by a resident of Spain is liable for Spanish taxation and no longer subject to UK tax. Government service pensions, however, are a key exception.
Government service pensions
Pension income arising from UK government service remains fully taxable in the UK, under the usual income tax rates and with the personal allowance.
It is not directly taxed in Spain, but although you don’t pay tax twice, you must still list it in your annual tax return. This enables the pension income to be included when calculating the Spanish tax due on your other annual income. This could push you into higher tax bands and increase your tax bill.
Government service pensions are civil service or local authority pensions. This can include teachers, police and fire brigade pensions, though not in all cases. NHS pensions don’t necessarily count as government service.
UK state and occupational pensions
UK state and occupational pensions are taxable only in Spain. Your pension income is treated as ‘general income’ and subject to the scale rates of income tax. These vary a little according to which region you are resident in, as follows:
| Region | Starting from | Up to |
| Andalucía | 19% for income up to €13,000 | 47% for income over €300,000 |
| Balearics | 18.5% for income up to €10,000 | 49.75% for income over €300,000 |
| Canaries | 18.5% for income up to €3,010€ | 50.5% for income over €300,000 |
| Cataluña | 20% for income up to €12,450 | 50% for income over €300,000 |
| Madrid | 18% for income up to €13,362 | 45.9% for income over €300,000 |
| Murcia | 19% for income up to €12,450 | 47% for income over €300,000 |
| Valenciana | 18.5% for income up to €12,000 | 54% for income over €300,000 |
The state retirement pension is always paid gross in the UK, so you simply declare and pay tax on it in your Spanish tax return.
When it comes to your other pension income, however, the UK will continue to deduct tax at source until they are satisfied that you are resident in Spain and paying Spanish tax on this income. You can request a tax residency certificate from your Spanish tax office and send it to HM Revenue & Customs.
UK private pensions
The taxation of UK private pensions in Spain is much more complicated. It can give rise to interesting anomalies because of the confusion over the meaning “purchased annuity” in Spain.
Given the complexity and ambiguity of the subject, we recommend that you take highly personalised and specialist advice from an adviser with thorough knowledge and experience in both UK pensions and Spanish taxation.
Pension lump sums
This is one tax trap many Britons moving to Spain fall into. The UK rules allow you to take a 25% ‘pension commencement lump sum’ tax free. But if you take this lump sum after becoming resident in Spain, it is taxed in the same way as other pension income – there is no tax-free element.
QROPS
Income from a Qualifying Recognised Overseas Pensions Schemes (QROPS) is taxed the same as occupational pensions, at the scale rates of general income tax.
While a QROPS can provide British expatriates with advantages over a UK pension fund, you need to be aware that Spain will apply a detrimental tax charge if you make the transfer after becoming a tax resident of Spain. In summary, where a non-EU/EEA pension fund is transferred into an EEA pension scheme, Spain will apply a personal income tax charge on the whole fund value.
If moving to QROPS is not feasible for you, take regulated advice on what other options are available for your pension and which is most advantageous for you. For example, consolidating several different pension funds into a single SIPP could work well. You can set it up with the investment approach aligned to your attitude for risk, potentially improve your benefits, and make life easier too.
Wealth taxes
Although pension plans can be exempt from Spain’s annual wealth tax, non-EU pensions do not qualify for this exemption. If you can take benefits from your UK pension fund, it is included in your list of assets assessed for wealth tax each year. This aspect of the law is subject to interpretation and change, so seek advice to understand the latest position.
Wealth tax may not be an issue for you, depending on your level of wealth and which region you live in. Andalucía and Madrid have effectively abolished the standard wealth tax for residents, while Murcia and the Balearics increased the personal allowance to €3,700,000 and €3,000,000, respectively. While all regions are subject to the ‘solidarity tax’, it generally only impacts those with wealth over €4,000,000.
Learn more about taxes in Spain by downloading our free guide.
Your other retirement savings
In Spain, investment income is taxed as ‘savings income’ at progressive rates from 19% to 28%.
Life assurance contracts, where you hold your choice of investments within its ‘wrapper’, can provide significant tax advantages in Spain. Take wealth management advice to establish if these arrangements would be suitable for your objectives and circumstances, and how you could potentially benefit from them. Some British expatriates opt to cash in their pension to reinvest the proceeds in these arrangements, but first carefully evaluate if this is a suitable option for you.
Reviewing your pension arrangements
Whether you are still planning your move to Spain or already live there, you need to review your retirement savings and establish what is best for your current and future circumstances. It’s important to weigh the pros and cons of all your options, taking your personal situation and goals into account, to establish which is most suitable for you. Then regularly review your objectives, which could mean changing your investment profile, reassessing your risk tolerance, or developing an alternative strategy that embraces your overall financial situation.
UK pensions are complex, with frequent reforms, and making a wrong decision could impact your retirement security. Taking professional and regulated advice is essential. UK-based advisers rarely have in-depth understanding of Spanish taxation and may not be able to keep up to date and react quickly where needed. Also, most UK advisers are not regulated to give advice to EU residents.
You, therefore, ideally need personalised advice from a Spain-based adviser who can provide integrated advice covering pensions, investing, and cross-border tax and estate planning covering both Spain and the UK.
Blevins Franks is authorised to provide regulated advice on UK pensions to residents of Spain. With offices in both the UK and across Spain, as well as teams of pension and tax specialists, we have in-depth knowledge of the UK pension and Spanish tax regimes and the planning opportunities for expatriates. We provide integrated advice covering pensions, cross-border taxation, estate planning, investment and residence. Our pensions solutions cover all these elements, for both Spain and UK, and are personalised for your circumstances and objectives.
Contact Blevins Franks now.
