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UK Pensions and Tax When Living in Spain

Spain continues to be one of the most popular overseas destinations for British retirees seeking sunshine not showers in their retirement.  It is an accessible destination from the UK, it’s famed for its laid back lifestyle and living in Spain costs relatively low, and what’s more, the weather truly is glorious for the majority of the year on the coast in Southern Spain.

If you’re planning on living in Spain – a retirement to a Spanish villa or perhaps a finca in the countryside, we don’t blame you!  In this article we’ll cover UK pensions and tax for you when you’re living in Spain.  It’s important to know what your liabilities will be before you go so you can make sure you have all your planning in order before you relocate.

The first thing you need to know is that your pension income may come from multiple sources.  You may be in receipt of the government state pension as well as a government service pension, you may also have income from an occupational pension or a personal pension.  Each type of income is unfortunately classed differently for taxation reasons in Spain.

At this point it is important to mention that if you’re moving to live in Spain you should really take taxation and financial advice from a qualified international independent financial adviser and/or an accountant, because each individual’s financial situation is very different and you need personalised advice about your own affairs from a qualified person.  This article is for general information purposes only, it does not constitute advice.

You state pension income is taxed in the country in which you are a tax resident.  If you move to Spain permanently and have been in residence for over 183 days in their tax year you will generally be considered tax resident in Spain.  Spanish income tax rates currently run in incremental stages between 24 to 43%, but these figures change annually so check!

With the exception of any government service pension income that you get from the UK, all your worldwide pension income will be subject to Spanish income taxation.  However, the way income from personal pensions is treated in Spain can differ!  Just to confuse matters!  This is because there is a slight differentiation between the true meaning of the term ‘purchased annuity’ in Spanish and in English when it comes to tax.  Basically, purchased annuities are taxed favourably in Spain!  It is a fact that UK pensions require the pension account holder to purchase an annuity from an insurance company with a percentage of their pension pot.  This annuity then pays out an income for the duration of the life of the account holder.  This type of income from an insurance company is taxed favourably in Spain.  So favourably in fact that 76% of it is tax-free!

When it comes to private pensions where a trustee has bought the annuity on behalf of the pensioner this can be taxed in the same way…although some tax offices in Spain treat this income as pure income and tax all of it according to the usual progressive rates!  You really need to bring in an adviser at this point to help you find the most tax efficient way of declaring this income, because once it has been deemed taxable in a certain way, you cannot then change the way it is taxed!

Finally you have your government services pensions that people who have worked in the civil service or as teachers or firemen might receive…this does not include NHS pensions.  This type of government service pension income is taxed at source in the UK.

If you’re planning on living in Spain you need to find out up front what your taxation liabilities and daily outgoings are going to be so that you can budget and determine if you can afford to retire to Spain and reside in the manner to which you would like to become accustomed!  Get professional taxation and financial advice…

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