Pensions in Spain
A common concern of those setting up home in Spain during their retirement years is their pension. In particular they worry about whether they can continue to collect their UK pension entitlements and whether it becomes liable to tax in Spain.
The social security payments made after establishing a new home in Spain contribute towards an old age pension provided they are made for a minimum of 15 years. However, for most ex pats, the amount of money they receive from UK pensions will be far greater, and far more important to protect from taxation as much as possible.
If your pension is structured properly it is possible to reduce the amount subject to tax in Spain by between 30% and 70%.
Which pensions are liable to tax in Spain?
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. An exception to this rule comes in the form of government service pensions which remain liable to UK tax even though it is tax-free in Spain.
UK state pensions do not come into this category and are once more liable to tax in Spain but not the UK.
Using the system of tax in Spain to optimise your pension
Purchased annuity, meaning 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.
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.
You need specialist tax and investment advice on pensions if you are to maximise the benefits before and after retirement.
There are a number of companies which offer UK and International Tax Advice specialising in tax in Spain. One such expert is Blevins Franks. The amount of your pension in Spain liable to tax could be massively reduced with specialist advice. This is crucial if you are to maximise your entitlements to make the most of your new home in Spain.
