skip to Main Content
The Federation of European Independent Financial Advisers
Pensions are somewhat a confusing area in Portugal and the tax system does not easily accommodate the many different types of pensions individuals may have. We have seen many professionals report pensions in different ways, depending on their interpretation or understanding of the pension in question.

As there are many types of pension schemes and ways of funding them, maybe with overseas or UK elements, this area can be quite tricky to navigate and it is best to seek advice from a professional with a proper understanding of the details.

Speaking generally, for those with NHR, UK pension income is taxed at a flat rate of 10% in Portugal, unless you successfully applied for NHR before April 2020, in which case it is free of tax.

For normal residents, pension income is generally taxed at scale rates. There are some exceptions to this for example, annuities or certain pensions that are treated as long-term savings.

UK pensions are usually taxed at source but in most cases, you can ask your pension provider to make payments out to you gross; this avoids you having to reclaim the tax paid at source from HMRC. You will need to inform your pension administrator that you are no longer UK resident and obtain an ‘NT’ tax code.

The UK State Pension is taxable in Portugal and you can also ask for this to be paid out to you gross.

UK government service pensions are always taxable in the UK e.g. civil service, armed forces. Portugal does not tax these pensions or include them as income for reporting and tax purposes.

Taking your ‘tax free cash’

An important point in relation to the taxation of pensions is with regard to the pension commencement lump sum (PCLS) and withdrawals under “pension freedoms” arrangements.

In the UK, it is possible to take a lump sum of up to 25% of the value of your defined contribution (e.g. a personal pension or SIPP) pension pot tax free. A tax-free amount is also available from a defined benefit scheme (final salary scheme) pension although this uses a different calculation method. Please note, these PCLS amounts are not tax free in Portugal. As a general planning point, we would therefore suggest utilising any PCLS entitlement prior to becoming Portuguese tax resident. However, your personal circumstances will dictate the best course of action.

We recommend that your pensions are reviewed regularly and at least on an annual basis.

 

The above article was kindly provided by The Spectrum IFA Group and originally posted at:  https://www.spectrum-ifa.com/how-is-my-pension-taxed-in-portugal/