Pensions for a new era

Compliance is a top priority for many in a world fraught with fiscal and monetary uncertainties and automatic information sharing. Those who wish to reach a safe retirement, or to retain a comfortable lifestyle in retirement, then read on.
Pensions are provided by the State/public sector, companies, personal pensions or pension vehicles purchased by cash-rich individuals of any nationality from any jurisdiction.

For the former, with continuously falling government bond yields reflected in the secure incomes, today company schemes have to produce annual pension cash transfer values at historically very high figures.

For the latter, whether you have a five figure or six figure lump sum on deposit or in a portfolio of shares, a tax-friendly environment such as a pension is far more tax-efficient and a more acceptable way to hold your long-term savings to maintain your standard of living in retirement.

Mainstream pensions are in essence long-term savings made by way of contributions over an individual’s working life through the occupational or personal domain. I describe this as mainstream because for others, particularly in the personal domain, their pension can mean something quite different.

For these individuals, they may have built up a property portfolio or business that has culminated from the growth of a single contribution that has enjoyed the appreciation of market values or the success of the goodwill from the business sale.

The result is that the individual would have a “pension pot” at their disposal to provide an income for life so that a return to work should be unnecessary.

Through the years, these mainstream pensions would have benefitted from the individual’s contributions tax relived contributions from the national tax/revenue office and grow tax efficiently.

Collectively these benefits are described as “tax exempt” (even though certain taxes cannot be avoided such as the 10% tax credit on UK dividends) so that the pension pot can grow to its maximum potential. The end game at retirement is that the retiree draws a retirement income which is fully assessed for tax purposes.

Normally, when income is drawn from such a pension pot that is situated outside of Portugal such as the UK, tax is withheld at source at 20% and therefore income is paid net of tax.

As a Portuguese tax resident, the recipient of the income must be declared and assessed in Portugal therefore creating a second round of taxation. To avoid paying tax twice, international or double tax arrangements between the country of tax residence (Portugal) and the country where the pension pot resides should exist to subsequently cancel out the unwelcome event of being taxed twice.

In this case, a great deal of work is required to ensure that the administrators of the overseas pension makes payments gross to avoid the added complexity of balancing out international tax payments and disputes.

For many Brits in this situation, Qualified Recognised Overseas Pension Schemes (QROPS) have been the solution to ensure that their pensions still continue to make tax-efficient investments and pay income gross without interference. Also, for the underlying investments, specifically offshore cash deposits and fixed interest investments, will permit interest within the pension to be paid gross (i.e. exempt from the EU Savings Directive) which can increase the return even further.

For those who have managed to accrue some significant savings or wealth from the sale of an asset such as a main or secondary residence, these individuals, irrespective of nationality, can purchase a pension vehicle from many jurisdictions.

The immediate benefit is to tailor the assets in an environment whereby the return is increased by up to 28% and 35% through tax savings on dividends and bank interest, respectively.

For the multi-national market place, these are identified as International Pension Plans.

Whilst UK legislators describe these as Qualified Non-UK Pension Schemes (QNUPS), offshore pension structures are available for all Europeans which could benefits from a tax-friendly environment to accommodate private and personal capital. The underlying investments can enjoy the same tax exemptions as a QROPS and even something similar as European Union Retirements Benefits Schemes (EURBS) could also provide the answers.

If you plan any change to optimise your tax position through the pension income you receive or through the investments you wish to make, you will need to ensure that it is understood and compliant. The cost and strain for the long-term gain should be a one-time operation with your global financial objectives on a steady course as we move into a global financial information sharing age.

All statements concerning tax treatment and their benefits are based upon our understanding of current tax law and practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change.

This article is intended to provide a general review of certain topics and its purpose is to inform, not to recommend or support any specific investments or course of action.

By Raoul Ruiz Martinez
|| features@algarveresident.com

Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000. | 289 561 333