RETIRING ABROAD IS BECOMING INCREASINGLY POPULAR. A WARMER CLIMATE, GREAT CUISINE AND A CHANGE IN LIFESTYLE CAN BE FOUND IN MANY EXPAT LOCATIONS, INCLUDING SPAIN AND MALTA. HOWEVER, IN RECENT YEARS, MORE AND MORE PEOPLE ARE RETIRING OVERSEAS FOR FINANCIAL REASONS. HERE the experts at Goodbody EXPLORE THE FINANCIAL IMPLICATIONS OF DOING SO …
In recent years, there has been an increase in the number of foreign pension transfers. This has been driven by changes to the treatment of large pension funds, as well as a succession of harsh budgets since the financial crisis, which resulted in the introduction of the Universal Social Charge, the Pensions Levy, and reduced thresholds for maturing pension funds (see the timeline below).
Pension measures introduced in Ireland since the financial crisis
2009: Earnings limit for tax relief on pension contributions by an individual is reduced to €150,000.
2010: The maximum pension fund (Standard Fund Threshold) allowed by Revenue is reduced from €5m to €2.3m with the excess taxed at 40%.
2011: The Pensions Levy of 0.6% on all pre-retirement private pension funds is introduced for four years.
2011: The maximum tax-free lump sum payable from private pension funds is reduced from €575,000 to €200,000. The lump sum is taxed at 20% between €200,000 and €575,000.
2011: Earnings limit for tax relief on pension contributions by an individual is reduced to €115,000.
2011: PRSI and USC relief is removed for employee pension contributions.
2014: The maximum pension fund allowed by Revenue is further reduced from €2.3m to €2m.
2014: The Pensions Levy increases to 0.75% and is extended by one year at a reduced rate.
2016: Certain pension funds (vested PRSAs and Personal Pensions) cannot be accessed after age 75.
Some pension advisers and tax consultants will tell you that you can move your pension fund to another EU member state under the freedom of movement, labour and capital regulations. However, at Goodbody, we generally recommend that you only consider moving your pension fund abroad if you intend to move overseas yourself.
If you decide to retire overseas and transfer your pension, Revenue requires you to sign a declaration that states:
-The transfer conforms to pension transfer regulations and Revenue transfer rules; and
-It is for “bona fide” reasons and not primarily for the purpose of circumventing pension tax legislation and Revenue pension rules and conditions.
If possible, you should move your pension fund before you retire and before you reach the €2m threshold.
Another important consideration is timing. If possible, you should move your pension fund before you retire and before you reach the €2m threshold. There are no provisions in legislation which allow an approved retirement fund to transfer abroad. It would be considered a once-off income drawdown by Revenue and taxed accordingly.
State pensions and defined benefit pensions cannot be transferred abroad. However, your tax liability will be determined by your residency, and you may be able to reclaim tax deducted if you are residing abroad. The people who can benefit most from this are those who have accumulated large pension funds in company pension schemes – these pension funds could potentially transfer and reap the rewards.
In our case study, we explore why Malta has become a popular destination for pension transfers.
Case study: retiring in Malta
With a warm climate, high standard of living, and affordable day-to-day costs, Malta is a prime destination for those who want to retire abroad – and in recent years, the country has become a popular destination for pension transfers.
Here’s why. Most EU registered pension schemes can be transferred to a pension scheme in Malta. Interestingly, there is no residency requirement, and so, you can live wherever you wish – but not in Ireland.
In Malta, if you have a pension fund of €2m, your retirement lump sum could be as high as €600,000, whereas in Ireland it would be limited to €440,000.
From our clients’ experiences, the retirement lump sum is not the main driver for retiring in Malta, but rather the €2m pensions cap is the main motivation for the move.
After all, a significant number of people are reaching the pensions cap in their 40s and 50s. They want to have the freedom to grow their funds for another 10 or 15 years before they retire. But under an Irish pension scheme, they will face an extra tax of 40% on the excess over the €2m. This is not the case in Malta where there is no limit or cap on the size of your pension fund.
What’s more, there is no requirement to draw any income from the remaining fund in the Maltese pension scheme until you need to. Conversely, in Ireland, you must draw a minimum of 4% each year from 60 years onwards. That income is taxed under the PAYE system irrespective of your residency. Quite often, people would prefer not to draw this income as their retirement lump sum will often cover their living expenses for several years.
Goodbody has teamed up with a regulated international pensions firm to assist our clients if they decide to move and the pension fund can be managed here in Dublin. We also recommend clients obtain professional tax advice if they are considering moving abroad as legislation can change and you need to be aware of all of the implications of the move.
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