Residents of Spain with UK pensions

Expat financial advice for pension planning abroad

UK-based pensions have specific tax liabilities and obligations which are set out below. Residents of Spain can protect themselves from these tax obligations by transferring their UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS).

How Your Pension Will Be Taxed in the UK

Unlike Spanish tax rates for pensioners, pension payments in the UK are, in most cases, taxed as earned income. Under the current rules established in 2006, all types of approved schemes have the same tax treatment as registered pension schemes. This includes small, self-administered schemes, personal pensions, self-invested pension plans, and occupational schemes.

Even if you are not a UK resident, you will be taxed on income that originates in the UK, such as a UK-based pension. UK pension payments are taxed at the individual’s UK marginal tax rate. Currently UK income is taxed up to 45% at the top rate. Some countries, however, have Double Tax Agreements, or DTAs, with the UK. As one of the benefiting nations, citizens can claim UK pensions in Spain, with agreement rules stating you will only be taxed in your residing country except under certain circumstances. Put simply, it is possible to essentially transfer a UK pension to Spain.

Death benefits and their tax treatment

If you have a UK Defined Contribution (DC) scheme (eg a SIPP or Personal Pension), the benefit payable on death to your beneficiaries is usually the value of your fund at the date of death. If you have deferred benefits in a UK ‘defined benefit’ scheme (often referred to as a ‘final salary’ scheme), it is not possible for your family to receive the capital value of your pension on your death – a dependant’s pension is usually payable instead which is taxed as earned income. I

However, if you accept a transfer value and move your Defined Benefits to a ‘defined contribution’ arrangement – a QROPS for example – then the whole value of your pension fund can be passed to nominated beneficiaries on your death. This is often a very important consideration for those who have been offered high transfer values.

In general terms, both lump sum and income payments from a QROPS will be free of UK tax if the member dies before age 75, providing any lump sum is paid out within two years of death.

However, if the member dies after age 75 then different rules apply. Marginal rates of UK tax will apply to all payments unless

  • The beneficiary is non-UK resident and
  • The member was not UK resident in any of the last 10 consecutive years and
  • The member did not transfer within five years of death.

Even if none of the above restrictions apply the beneficiary may still be taxed in the member’s country of residence on any lump sum or income payment so it is essential to take independent tax advice on the tax status of any such payments.

Considerations for transferring your defined benefit arrangement to a QROPS

Qualifying Recognised Overseas Pension Scheme (QROPS) normally pays retirement income without any tax being deducted at source although there are some exceptions.

It is possible to pass the entire value of your pension fund to members of your family, in some cases free of UK tax – but please note the comments above.

A transfer to a QROPS, for a resident of Spain, removes the effect of the UK Lifetime Allowance (LTA) – see below – which was set to be abolished in the Spring of 2024.

The Lifetime Allowance (LTA)

A major reason to transfer to a QROPS was the Lifetime Allowance (LTA) which imposed a limit of £1.73m on the total ‘tax-privileged’ amount you could hold in your pension fund.

Any fund in excess of this amount would be taxable at 25% (or possibly 55% if you took the excess amount as cash).  A transfer to a QROPS would remove any future liability to the LTA .

The Spring Budget 2023 abolished the tax on any excess funds with the LTA itself due to be abolished in April 2024 which means that one of the main reasons for considering a transfer to a QROPS has now diminished in importance.

However, the Labour Party has said that if it wins the next General Election, it will reintroduce the LTA.  This means that there may still be a case for transferring to a QROPS if you have a fund in excess of the LTA or if it is likely to be so by the time you retire.

Overseas Transfer Allowance (OTA)

You may think that because the LTA excess charge has been abolished, you can ‘crystallise’ (transfer) your UK funds to a QROPS with no charge even if you are over the current LTA of £1.73m.  However, the Government has introduced a new charge known as the Overseas Transfer Allowance (OTA).  The charge is 25% of the excess over £1.073m for any transfer from a UK scheme to a QROPS. A transfer to another UK arrangement – such as to a SIPP or another Personal Pension – is exempt.

However, you could still give serious consideration to a transfer to a QROPS even if your fund is in excess of the OTA. The reason for this is simple – any excess charge will simply increase over the years as your fund grows.  You may wish to rid yourself of any future potential liability by transferring to a QROPS sooner rather than later.

Both Malta and Gibraltar are attractive choices for a QROPS transfer because they offer very favourable terms.

Pension Plans Transferred to a Malta QROPs

In order to better protect your pension payments from income tax as well as inheritance tax, you may decide to take advantage of QROPS and transfer your pension to another jurisdiction. Both Malta and Gibraltar are attractive choices because they offer very favourable terms.

Pension Plans Transferred to a Malta QROPS

There is a Double Tax Agreement between Spain and Malta, so that pension payments are only taxed in the country where the individual has residence. Under the DTA, payments from a QROPS pension transferred to Malta would not be taxable in the UK or Malta, but only in Spain.

Pension Plans Transferred to a Gibraltar QROPS

There is no Double Tax Agreement between Spain and Gibraltar, so pension payments would be taxed at the current rate of 2.5% in Gibraltar and the appropriate rate in Spain. However, foreign tax credits are available for the Gibraltar taxes paid on pension income.

Income Tax for Residents of Spain

The Spanish tax system for individuals who are resident in Spain is Spanish Personal Income tax (PIT).  A Spanish resident is defined as someone who has been living in Spain for six months (183 days) or more in a calendar year. This does not need to be a consecutive period. You will also count as a Spanish resident for tax purposes if, for example, you run a business in Spain. Rates for 2023 ranged from 19%-47% and from 19% to 28% for savings income.

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