Renta vitalicia...

[rafiki]

I see from David's book, if I read it correctly, that pension income derived from a lifetime annuity receives a tax reduction depending upon the age at which one begins to receive the income. The bands shown include 60-65 years at which 24% of the income is taxed and 66-69 years when only 20% of the income will be taxed. If I begin to draw my pension just after my 65th birthday, for purposes of the calculation, am I 65 or 66? It reads as if I will be taxed on 24% but I am wondering (hoping) it will be 20% as I will be in my 66th year.... David??

Oh - and could you confirm that this allowance is applicable to UK annuities?

[El Cid]

You are not 66 until your 66th birthday so the allowance will be 24%.

The income is treated as investment income and is taxed at a flat rate of 18%

Sid

[rafiki]

Thanks Sid...and it will be 18% of 24% of the income? 76% is non-taxable?

[rafiki]

The income is treated as investment income and is taxed at a flat rate of 18%

Sid

Would income derived from a UK pension pot that was put into an income drawdown scheme (instead of converting it immediately to an annuity) be taxed at 18% too?

[El Cid]

To answer your first question, yes you pay 18% on the 24% which makes the effective tax rate 4.3%.

As for the drawdown I guess it comes down to whether the Spanish tax office consider that policy qualifies. Personally, rather than ask, I would just claim that it does and enter the income in the Renta Vitalicia box.

If you think about why the annuities are treated so favourably it is because the income from them consists of interest on the lump sum and a payment of capital in addition.

The logic is that you only pay tax on the interest element and not on the capital element. The reason for the different age breaks is that the older you are when you start the payments, the greater the capital element.

Sid

[gus]

I'm not sure about Spain, but, be aware that in the UK there is a distinction between a "purchased life annuity" and a "compulsory purchase annuity".

The former is where the individual makes the decision to buy an annuity, in which case the "income" derived is considered to be a mix of return of capital and an interest payment . Only the interest payment is taxable. The older you are at date of purchase, the higher the element of return of capital and the lower the element of interest payment which is liable to tax.
A C.P.A. is an annuity purchased from the proceeds of an approved Pension arrangement - which has already had favourable tax treatment both on contributions made to it and investment income earned before pension commences. In this case, the whole of the income is chargeable to tax.

In the UK, any income from a drawdown scheme (other than the "25% tax-free cash" element) is fully chargeable to tax.

[El Cid]

I'm not sure about Spain, but, be aware that in the UK there is a distinction between a "purchased life annuity" and a "compulsory purchase annuity".

But we are talking about Spanish tax here and the rules are not necessarily the same.

If you are not sure if the particular annuity is applicable then only the tax office can advise - most financial advisors in Spain don't have a clue about this.

Sid

[gus]

I appreciate that, Sid, but the point here is that there is a distinction between a "pension" and the income derived from a "lifetime annuity" in the UK and I'm sure that will be the case in Spain also.
Unless you are suggesting that all "pensions" in Spain are taxed as "lifetime annuities" with the appropriate reduction for capital content?

If that were the case then I will be looking at taking up tax residency in Spain!!

[El Cid]

The thread was not about pensions but about Rentas Vitalicias which is a very specific term in Spanish tax law - there can be no confusion with pensions which are treated as earned income under the Spanish tax system.

Basically if your personal pension provisions are a "money purchase" scheme where you personally get to make the decision to invest it in an annuity - that's what we are talking about.

Another very important difference between UK tax and Spanish tax is that any lump sum payment from any sort of pension fund is taxable. It is not taxed at the full rate but it is taxed - the amount depends on the specific details of the pension.

Sid

[gus]

I'm not questioning your knowledge of the Spanish system, Sid, but personal "pension" provisions in the UK, require that you purchase an annuity with at least 75% of the proceeds. This income is taxed as earned income.
Drawdown provisions are a little(?) more complex but, again, income is taxed as earned income.
I would expect the same to apply in Spain.

I'd just mention that Rafiki did ask for assurance that this applied to UK annuities - and also further asked if it applied to drawdown arrangements. It would seem to me that he is asking about UK pension arrangements and "confusing" these with the "renta vitalicia" provisions in Spain.

[El Cid]

I am afraid you are just confusing the issue by constantly referring to UK tax rules which have no relevance whatsoever in Spain.

The rules here are entirely different.

I have a UK annuity which is taxed at the reduced rates, I have a UK draw down pension to which the same applies and I also have a UK state pension which is taxed as earned income.

There is little more I can add to this discussion.

Sid

[rafiki]

That is exactly the situation I am likely to be in when we move permanently to Spain quite soon Sid and answers my questions. Thanks once again.