Pensions and taxes – What you need to know in Cyprus

How much tax will you pay on your UK pensions in Cyprus? Cyprus offers a favourable tax regime for foreign pensions, which, coupled with its other tax benefits and the local lifestyle, makes the island an attractive place to enjoy your retirement years.

We work hard to build up our pensions for a secure and enjoyable retirement; to be able to do all those things we didn’t have time for before and have peace of mind about our long-term future. It is therefore important to carefully weigh up all your pension options before making any decisions, to establish which best suits your circumstances and objectives. This includes understanding the tax implications, both in Cyprus and the UK.

Cyprus taxation of UK pensions

With the exception of pension income from government service, once you are tax resident in Cyprus your UK pension income is only liable to Cyprus taxation.

Cyprus taxes all foreign pension income on a worldwide basis. You can choose how it is taxed each year, as follows:

Option 1 – at 5% tax

All your pension income can be taxed at a flat 5%. This is above a tax-exempt allowance of €3,420.

Option 2 – at the income tax rates

Your pension income is added to your other income for the year and taxed at the normal scale rates.

The first €19,500 is exempt. Tax then starts being applied at 20% for income from €19,501 to €28,000 and rises progressively to 35% for income over €60,000.

UK state pensions are paid gross of tax, but you need to apply for your other pension income to be paid gross so it is not taxed twice. The Cypriot tax authorities will first need to certify and stamp the UK’s Form DT-Individual to confirm you are a tax resident in Cyprus.

Government service pensions

Under the latest UK/Cyprus double taxation treaty, which came into force in 2019, UK government service pensions are now taxable in the UK (unless you are a Cypriot national). This brought Cyprus into line with most other countries.

This reform was implemented gradually so that you could elect to apply the terms of the old treaty and have your pension taxed in Cyprus – but this ends in 2024.

Pension lump sums

Pension commencement lump sums are not taxable in Cyprus, even if taken whilst a Cyprus resident. This is under the domestic ‘exempt income’ rules. The lump sum amount is not taxable in the UK, and so can be taken free of tax in both countries.

UK taxation

The UK has frozen income tax thresholds until 2028, which affects those paying UK income tax on their pensions.

On a positive note, the UK’s 2023 budget abolished the pensions lifetime allowance and resulting 25%/55% tax charges – very welcome news for those who have built up larger pension savings over decades of contributions and growth.

This is not necessarily permanent, though, as a future government could reverse this move, which the Labour Party quickly pledged to do.

There may therefore be a limited opportunity to transfer your pension out of the UK and avoid any future lifetime allowance charges.

Reviewing your pension arrangements

If you are a resident of Cyprus and have a UK pension you need to review your pension arrangements and establish what is best for your current and future circumstances.

Pensions are not always set in stone; like you they might benefit from moving abroad, and you need to 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.

Far too often pension decisions are taken in isolation based on options provided by UK pension companies who are oblivious to your needs and the tax implications of living in Cyprus.

Another issue is regulation. Since pensions are complex and making a wrong decision could impact your retirement security, taking professional, regulated advice is essential. The problem for British expatriates is that most UK advisers are not regulated to give advice to EU residents – they lost their ‘passporting’ rights with Brexit. Unless they have taken steps to be correctly regulated, they should not be advising you.

Blevins Franks is authorised to provide regulated advice on UK pensions to residents of Cyprus. With offices in both the UK and Cyprus and teams of pension and tax specialists, we have in-depth knowledge of the UK pension and Cyprus 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 Cyprus and UK, and are personalised for your circumstances and objectives.