If you retire and live abroad make sure that you understand the tax position of your pension before you leave the UK. The UK has a number of so-called “Double Tax” agreements with other countries that set out how income generated and paid from the UK, such as pensions, is taxable.
For example the UK State Pension is paid to people who have reached State Pension age and is based on National Insurance contributions made by the pensioner during their working life. Even though the pension is effectively drawn and spent overseas relief from UK income tax is available under the terms of many, but not all, double taxation treaties.
If you receive a pension that is paid for service to the UK Government or a local authority, it is important that you look at the text of the relevant double taxation treaty. There are three possible tax treatments:
- A pension paid by the Government of a territory to one of its former employees will, under most but not all double taxation treaties, continue to be taxed by that Government. However that is not always what has been agreed in a particular treaty and there are variations to this general rule.
- Some treaties also provide that, in addition to pensions paid by central government, pensions that are paid to former employees of local authorities will continue to be taxable by the territory that is making the payments.
- Many treaties provide that where a person is paid a government pension by one territory and is a national of (and resident in) the other territory then the right to tax the pension is transferred from the UK to the territory in which the person is resident.
As rates of tax vary pensioners are advised to seek professional advice before moving abroad to ensure they fully understand their tax position.
And don’t forget, in most cases you will receive your UK pension in £ Sterling, when exchange rates fluctuate you may find the local currency depreciating or appreciating against the £.