If you’re retiring to Portugal, how will your UK pensions be taxed there? Understanding the cross-border tax implications helps you plan ahead, avoid unwelcome surprises, and take the opportunity to establish the most tax-efficient option for you and your family.
You’ve worked hard to build your pensions up for a secure and enjoyable retirement. When embarking on your retirement journey, it’s important to carefully review all the options for your pensions to determine which best suits your unique family situation, income requirements, goals and risk tolerance.
Take the time to research and weigh the pros and cons of each option. Besides analysing income and growth opportunities, consider the tax implications –retiring in Portugal involves navigating two different tax regimes and how they interact. It is highly advisable to take specialist, cross-border advice covering pensions and taxation.
As a tax resident of Portugal, most (but not all) UK pension income becomes taxable to Portuguese taxation rather than UK tax. However, other aspects of UK taxation will continue to impact you.
How UK pensions are taxed in Portugal
Government service pensions
Pension income arising from UK government service is not taxed in Portugal at all; the income remains fully taxable in the UK.
Government service pensions are civil service or local authority pensions. They may also (but not always) be teachers, police and fire brigade pensions. NHS pensions don’t necessarily count as government service.
UK State Pension
Your UK State Pension is taxable only in Portugal, at the scale rates of personal income tax.
For 2026 income, tax starts at 12.5% for income up to €8,342, then rises progressively over eight income bands to 48% for income over €86,634.
Download our free Portugal tax Guide for the full rates.
Income over €80,000 is subject to an additional 2.5% solidarity tax, increasing to 5% for income exceeding €250,000. Be mindful of this if you take a large pension lump sum as a Portugal resident.
Occupational pensions
Likewise, occupational pensions are generally liable to the Portuguese income tax rates.
In some cases, where the pension fund includes employee/personal contributions, a more beneficial tax treatment could potentially apply to that element, but you must take personal advice as this is not straightforward.
Personal pensions
This is where things get more complicated, as it depends on how the contributions were made. The UK treats a range of arrangements – annuities, SIPPs, SSAS, and defined benefit or defined contribution schemes – as pensions for tax purposes. Portugal takes a more traditional approach: for income to be considered a pension, there must be an employer contribution (since pension income is viewed as deferred employment income).
Personal contributions are taxed differently than employer contributions:
- The capital element (the contribution) is not taxed and should be returned tax free.
- The growth element is treated as investment income, so you can opt for the fixed 28% rate.
Personal pensions without employer contributions can be considered a savings scheme and receive favourable tax treatment. However, most UK nationals have a mix of employer and personal contributions and cannot separate the two, meaning that in practice, most UK pension income is likely to be taxed at the Portuguese scale rates.
Pension lump sums
This is one tax trap many Britons 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 Portugal, it is taxed here in the same way as other pension income, with no tax-free element.
NHR holders
If you obtained non-habitual residence status before the regime closed a couple of years ago, you continue to benefit from beneficial treatment on foreign source pension income until your 10-year term ends. If you registered before March 2020, UK pension income (excluding government service) is tax free in Portugal, if after that date it is generally taxed at 10%.
No Portugal inheritance tax
While pension funds can be subject to a local inheritance tax in some countries (to soon include the UK), this is not a concern in Portugal. The local ‘stamp duty’ only applies to certain assets located there (excluding government pensions), the rate is just 10% and spouses and direct line descendants and ascendants are exempt.
Your other retirement savings
Investment income is taxed at a flat rate of 28% in Portugal. This covers interest and income from capital investments such as shares, securities and bonds. You can alternatively opt for the scale rates of income tax.
Life assurance contracts, where you hold your choice of investments within its ‘wrapper’, can provide significant tax advantages in Portugal. Take specialist wealth management advice to establish if these arrangements are suitable for your objectives and circumstances, and how much you could potentially benefit from them. Some British expatriates opt to cash in their pension to reinvest the proceeds in these arrangements, but carefully evaluate if this is a suitable option for you.
There can also be attractive tax options for residents in a position to encash their pension, making it comparable to NHR benefits. In the right circumstances, it is possible to access the funds with preferential rates between 7% and 12%.
UK tax considerations
UK government service pension income remains taxed in the UK at the standard income tax rates. You continue to benefit from the £12,570 personal allowance.
Individuals with higher-value pension funds may be affected by the UK’s Lump Sum Allowance, Lump Sum and Death Benefit Allowance and Overseas Transfer Allowance. The tax implications will depend on personal circumstances and residency status.
Regardless of the value of your UK pension funds, they will form part of your estate for UK inheritance tax (IHT) purposes from April 2027 onwards – and UK assets remain liable to IHT regardless of how long you live overseas. This groundbreaking reform will have a significant impact on your heirs, especially if you also retain other UK assets.
If you die over age 75 and your residual pension funds pass to UK resident beneficiaries, they will also pay income tax up to 45% – making a potential combined tax up to 67%.
It is still possible to transfer your pension funds out of the UK into a Qualifying Recognised Overseas Pensions Scheme (QROPS), but you will suffer the UK’s 25% Overseas Transfer Charge. This may be a price worth paying for some, when weighed against the amount of tax it could save your beneficiaries.
Reviewing your pension arrangements
When living in or moving to Portugal, you need to review your pension arrangements and establish the most appropriate approach for your circumstances and goals.
Pensions are not always set in stone . You need to keep up to date on tax and other relevant reforms, and regularly review your objectives. That could mean changing your investment profile, reassessing your risk tolerance, or developing an alternative strategy that embraces your overall financial situation.
British expatriates often take pension decisions in isolation, based on options provided by UK pension companies who are oblivious to their needs and the tax implications of living in Portugal. Take personalised advice from a specialist adviser who can provide integrated advice covering pensions, investing, and cross-border tax and estate planning covering both countries.
Blevins Franks has advisers living locally in Portugal, as well as teams of pension, tax and investment specialists in the UK. Our service is highly personal and tailor-made to meet the specific requirements of each of the families who are our clients.
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