Taking your UK pension in Spain – tax and advisory issues to be aware of

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UK pension in Spain

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

When taking your UK pension in Spain you need to explore the options available to you as an expatriate and understand all the tax implications – Spanish tax regulations change frequently. If you are still a UK resident, taking advice before you move to Spain could save you tax. Your adviser needs to be knowledgeable on taxation in both countries and regulated to provide advice on UK pensions to residents of Spain.

If you’ve chosen to enjoy your retirement in Spain, it’s likely your pension savings will fund much of your living costs. All those years saving for retirement finally comes to fruition and it’s time to enjoy the rewards.

First, though, you need to decide what to do with your pension funds once you’ve reached retirement, looking at the implications of living in Spain.  Your savings need to last as long as you do, keeping you financially secure, with the income keeping up with the rising cost of living.

Unfortunately, pensions can be complex.  UK regulations give you various options, depending on the type of pension you have.  Do you have a final salary scheme (defined benefit) or money purchase (defined contribution) pension?  Would an annuity work well for you or would a SIPP suit your circumstances and objectives?  Could you move your pension out of the UK into a Qualifying Recognised Overseas Pensions Schemes (QROPS)? Or potentially take it all as a lump sum to re-invest into a tax-efficient arrangement in Spain?

The first step is to establish what options are available for your pension funds, then explore them all carefully.  Ensure you do what is right for your situation and income needs, future plans, risk profile, and estate planning wishes. Your pensions are too important for your long-term financial security to get it wrong.

It doesn’t help though, that the UK regulations frequently change, sometimes for the better, but sometimes less so.  Spanish taxation rules can also change, impacting your options and tax bill – as we’ve seen the last couple of years.   Brexit has had consequences here too.

Spanish taxation and wealth tax

Once you are resident in Spain, most UK pension income is taxed in Spain and not liable to UK taxation. The exception is government service pensions, which remain only taxed in the UK.

There is no ‘tax-free lump sum’ in Spain. If you have not moved to Spain yet and want a lump sum, taking it while you are still a UK resident will save you tax.

Spain also imposes an annual wealth tax. Although pension plans can be exempt, a 2019 ruling by Spain’s Directorate-General for Tax (DGT) concluded that non-EU pension plans do not qualify for this exemption.

This means that since the UK left the EU, Spanish wealth tax now applies to a UK pension fund (from the point at which a member can take benefits). It is added to your other worldwide assets to calculate your tax liability each year.  This aspect of the law is subject to interpretation and change, so it is important that you seek advice to understand the latest position.

Wealth tax rates range from 0.2% to 3.5%, but every resident individual receives a €700,000 allowance plus €300,000 against the main home, with regional variations (Andalucía and Madrid residents do not pay the standard wealth tax).  The additional temporary ‘solidarity tax on large fortunes’ applies across Spain. It is currently only scheduled for 2022 and 2023 and only impacts individuals with wealth above €4 million. You don’t pay both wealth taxes, but you essentially pay the higher amount.

Download our free Guide to Taxes in Spain.

Spanish tax implications of moving to QROPS

For some expatriates, moving their pension out of the UK into a QROPS can be beneficial.  You gain more currency, investment, and estate planning flexibility, plus protection from future adverse UK pension reforms (such as if a new government reinstated the lifetime allowance).

However, be aware that a 2021 binding ruling in Spain determines that unless a pension is a Spanish or EU contract, a transfer from a ‘third country’ pension scheme to an EEA pension scheme is subject to a personal income tax charge – on the whole fund value.  So as a Spanish tax resident, you’ll want to think twice before transferring your UK fund into a QROPS, because that year you’ll pay Spanish income tax (up to 46%-54% depending on which region you live in) on the whole fund.

If you are not yet a Spanish tax resident you still have the opportunity to transfer to QROPS without this tax charge.   If you move to Spain in the second half of the year you will not be deemed a Spanish tax resident until the following January.

Other options

If moving to QROPS is not feasible, take specialist cross-border 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 an investment approach aligned with your attitude toward risk, potentially improve your benefits, and make life easier too.

Pensions advice post-Brexit

Since pensions are so complex and making a wrong decision could impact your retirement security, taking professional, regulated advice is essential.   It is important to weigh the pros and cons of all your options, taking your personal situation and objectives into account, to establish which is most suitable for you.

In any case, the UK rules require you to take advice from a regulated financial adviser before you can transfer a defined benefit scheme valued over £30,000.

The problem for UK nationals in Spain 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.

Even without this issue, it’s important to get local advice in Spain because most UK-based advisers do not have an in-depth understanding of Spanish taxation. And with the frequent changes, your adviser needs to keep up to date and react quickly where needed.

Find a qualified advisory firm that provides the specialist cross-border advice you need: thorough knowledge of UK pension regulations and of both UK and Spanish taxation and interaction between them. And they need to be regulated to provide advice on UK pensions in Spain.

Blevins Franks is authorised to provide regulated advice on UK pensions to residents of Spain.  With offices in both the UK and across Spain, and 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 today.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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