Tax on pension lump sums

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oliveview01
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Tax on pension lump sums

Postby oliveview01 » Fri Jul 11, 2014 4:10 pm

Hi Sid :wave: , do you know how the tax (here is Spain) is worked out on a UK work pension lump sum? Does the tax man here take in to consideration the money that was stopped from your wages and paid into the pension pot?

Thanks :thumbup:

El Cid
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Re: Tax on pension lump sums

Postby El Cid » Fri Jul 11, 2014 4:27 pm

Yes, it is taxable in Spain.

However it isn't as bad as you might think. Only the growth element is taxed. It's a complicated calculation but for example if your pension fund had a maturity value of 100k and the contributions into it over the life of the fund were 60k then clearly only 40% of the fund is "growth".

If you take 25k as the lump sum then only 40% of that is taxed and it is taxed at the lower savings rates.

The good news is that if you invest the rest in an annuity, you will pay hardly any tax on it. (see the FAQ for details).

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Re: Tax on pension lump sums

Postby infoseeker » Fri Jul 11, 2014 7:37 pm

But if you had waited and got that lump sum before moving to Spain, and then made sure you spent less than 183 days in Spain, inthe same year, you would have paid- nothing!

oliveview01
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Re: Tax on pension lump sums

Postby oliveview01 » Fri Jul 11, 2014 10:56 pm

Lived here for 10 years now, retired early, so waiting for ten years to save a tax bill was not an option!! :lol:

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Re: Tax on pension lump sums

Postby jogger » Sat Jul 12, 2014 6:19 am

So if someone gets their lump sum in nov in the uk and they don't move to Spain until say march the following year, they won't have to pay tax on their lump sum?

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Re: Tax on pension lump sums

Postby El Cid » Sat Jul 12, 2014 8:10 am

Correct.

Or, get it in June and move the following month as they would be in Spain for less than 183 days so would not become tax resident until the following year.

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Re: Tax on pension lump sums

Postby Free at Last » Sat Jul 12, 2014 9:15 am

El Cid wrote:Yes, it is taxable in Spain.

However it isn't as bad as you might think. Only the growth element is taxed. It's a complicated calculation but for example if your pension fund had a maturity value of 100k and the contributions into it over the life of the fund were 60k then clearly only 40% of the fund is "growth".

If you take 25k as the lump sum then only 40% of that is taxed and it is taxed at the lower savings rates.

The good news is that if you invest the rest in an annuity, you will pay hardly any tax on it. (see the FAQ for details).

Sid


Does this also apply to final salary pension schemes, Sid? How would you get a maturity value for your fund, and the figure for the amount of contributions paid in total? If only 40% of the lump sum is taxed, that's good news for me.

I was informed recently that the Trustees of my largest pension scheme have changed the rules to allow members with deferred benefits to take their pension early (subject to an actuarial reduction of 4% per annum, but the lump sum isn't reduced). I could have taken it from 1 July this year but have opted to wait until the beginning of January 2015 as the tax rates will be lower then, and it will mean a slightly lower actuarial reduction in the pension.

(I should add, this is not an "unfunded" public sector pension scheme.)

Like oliveview01, I took the view that retiring 10 years early and coming to Spain was a better deal than saving tax on a lump sum. :)

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Re: Tax on pension lump sums

Postby El Cid » Sat Jul 12, 2014 10:10 am

Free at Last wrote:

Does this also apply to final salary pension schemes, Sid? How would you get a maturity value for your fund, and the figure for the amount of contributions paid in total? If only 40% of the lump sum is taxed, that's good news for me.


Yes, anything that gives you a lump sum will be taxed.

When you are offered the lump sum, it should show the total value otherwise how could you work ot the 25% figure.

I assume you would have to get the relevant contribution figures from the employer or the pension provider.

The figure of 40% is just an example, it could be higher or lower depending on the actual figures.

It would definitely be worth waiting until 2015 as the tax rates will go down significantly.

At the moment the savings tax rates are used and they are 21% on the first 6k, 25% on the next 12k and 27% thereafter. They will change to 19% on the first 6k, 21% on the next 44k and 23% for anything over 50k.

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Re: Tax on pension lump sums

Postby Free at Last » Sat Jul 12, 2014 5:23 pm

Thanks for your reply, Sid. I was aware that the lump sum would be taxable here, but if tax doesn't have to be paid on all of it that's a bonus. I'll ask the Pension Administrator to provide the figure for the value of the fund (I guess it would be similar to providing a transfer value so they must be able to do that, plus the figures for the total employee plus employer's contributions, when I notify of them of the date I want the benefits to be paid from, which will definitely be 1st January 2015 at the earliest!

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Re: Tax on pension lump sums

Postby jogger » Sat Jul 12, 2014 7:25 pm

Thanks Sid
That is good to know and will help determine when we move over. So for the 183 days I don't do the residencia thing until after?


El Cid wrote:Correct.

Or, get it in June and move the following month as they would be in Spain for less than 183 days so would not become tax resident until the following year.

Sid

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Re: Tax on pension lump sums

Postby El Cid » Sat Jul 12, 2014 7:34 pm

It depends what you mean by "the residencia thing". You become tax resident by default after 183 days in one calendar year. You are not obliged to even register as a tax resident, although you can do so if you wish. You are obliged to present a tax declaration in the June following the year in which you became tax resident unless your income is so low as to be below the declaration threshold.

If you mean the requirement to register on the register of EU foreigners in Spain after 90 days, then you will still need to do that as your EU tourist status runs out after 90 days. This has no connection whatever with tax residency.

Sid

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Re: Tax on pension lump sums

Postby jogger » Sat Jul 12, 2014 10:41 pm

Got it, I did mean the requirement to register.
Thats great, thanks for that Sid.

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Re: Tax on pension lump sums

Postby Pondy » Tue Jul 15, 2014 10:56 am

Hi Cid, do you have a figure for annual income that would not require you to submit a tax return or would be below the declaration threshold?

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Re: Tax on pension lump sums

Postby El Cid » Tue Jul 15, 2014 11:07 am

It can be quite complicated. This site gives a very detailed explanation.

http://www.advoco.es/home/22-latest/39-do-you-need-to-submit-a-spanish-tax-return.html

They do point out that, irrespective of your income, that you should make a declaration in the year you become first tax resident.

Thereafter, if you meet the requirement to not have to declare you do not need to do it again, hover many people choose to submit zero returns every year.

Sid

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Re: Tax on pension lump sums

Postby Pondy » Tue Jul 15, 2014 8:40 pm

Thanks Cid, a very useful link

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Re: Tax on pension lump sums

Postby Gasman » Fri Jul 18, 2014 5:48 pm

OH's work related pension lump sum became due in 2012 and on the advice of our gestor was declared on the 720 and the Renta and tax was duly paid :angel: - I believe on the whole lump sum with no advice from the provider or the gestor that a calculation could be made to reduce it :thumbdown: Is it worth asking the provider now for the necessary figures, to claim a rebate from the Hacienda??!! or is all water under the bridge? :crazy:

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Re: Tax on pension lump sums

Postby alisonb » Fri Jul 18, 2014 8:26 pm

Sid - the link you gave to Advoco says (I think) that if you have two pensions not taxed at source but they total less than 11,200 euros, you don't have to make a tax return. But this is almost double the personal allowance which is deducted from income before paying tax. So what about the 5,000 gap between the allowance and the 11,200?
AlisonB

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Re: Tax on pension lump sums

Postby El Cid » Fri Jul 18, 2014 8:37 pm

You are forgetting the general allowance on earned income (which includes pensions) which is €4080 and possibly the over 65 age allowance of €918, so for a pensioner the total allowances are €10149 which is pretty close to the minimum for declaration.

It's also essential to declare in your first year of tax residency. Thereafter, you may possibly get away with not declaring, however, in my opinion, if you want to ensure that you continue to be regarded as tax resident, that you still declare every year even if no tax is due.

There are significant tax advantages for tax residents concerning IHT and CGT and you really don't want to have to argue about your tax residency when you are faced with potentially big tax demands in both these instances.

It costs nothing to make a declaration if you go to your local tax office and they are normally extremely helpful.

Sid

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Re: Tax on pension lump sums

Postby alisonb » Fri Jul 18, 2014 8:49 pm

Thanks for clarifying that Sid.
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Re: Tax on pension lump sums

Postby scampicat » Sat Jul 19, 2014 5:09 am

Glad we got my husband's lump sum from his Teachers' Pension before we went to Spain, and are now getting the lump sum from my Local Government Pension next month after we have come back. No tax to pay on either :)


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