If you have a pension in the UK and are now living overseas as a non-UK resident, when you start to withdraw your pension, you will need to be aware of the rules and tax implications not only in the UK, but also in your country of residence. Here is a list of some things you need to know about drawing your UK pension from overseas.
1. The tax free Pension lump sum
UK pension rules allow 25% of your pension to be paid tax free as a single lump sum. This is known as the ‘pension commencement lump sum’ or often just referred to as ‘tax free cash’. You can also choose to withdraw this as multiple lump sums, as long as they don’t exceed 25% of your pension value.
Even though this is paid tax free from the UK, it does not always mean that it will not be taxed in your country of residence.
Most countries will allow you to take part or all of your pension as a lump sum and will have their own tax rules and allowances. Some countries, however, do not recognise pension lump sums and you may have to pay income tax in your country of residence on the lump sum from your UK pension.
There is more information on this in point 4 below.
2. Tax on the pension in the UK
So we know you can get up to 25% of your UK pension paid as a tax free lump sum. The other 75% of the pension is treated as income, regardless of whether you draw this as a lump sum or as a regular income.
The UK pension provider will automatically deduct UK income tax from any income payments from your fund. For the first income payment, they will use an emergency tax code, which means you could have more tax deducted than necessary.
HMRC will then usually inform the pension provider of the correct tax code to use and the pension provider will use this for future income payments.
3. Tax on the pension in the country you’re living in
Most countries have their own rules on how they tax foreign pension payments. As mentioned earlier, some will allow pension lump sums to be tax free and some will treat all pension withdrawals as income and tax them accordingly.
A number of countries, including the United States, will allow you to keep the 25% lump sum tax free. In most countries however, including the US, the income payments from the remaining 75% of your fund will be subject to tax.
This may mean that you end up paying tax on your pension in the UK, and tax on your pension in your country of residence
4. Using double taxation agreements with your pension
To prevent you being taxed twice on your pension withdrawals, the UK has signed double taxation treaties with over 100 countries. The treaty will set out what country the pension will be taxable in, what type of pensions it applies to, and sometimes the treatment of lump sum and regular payments.
The agreement will normally state that your pension should only be taxed in one country and the majority of the UK’s double taxation agreements state that your pension should only be taxed only in your country of residence, however, you should check the UK’s double taxation treaty for the country you’re living in. Here is the list of the UK’s double tax treaties.
When you draw your UK pension from overseas, and the double taxation treaty states you should only be taxed in your country of residence, this doesn’t automatically mean that your UK pension will be paid tax free.
You will need to inform HMRC that you are no longer a UK resident, that your new country of residence has a tax treaty with the UK, and that your income will be taxed in your country of residence.
Once HMRC have approved this, they will inform your UK pension provider that they should not deduct any UK tax from your withdrawals.
When you transfer your pensions to MyExpatSIPP and start to draw your pension, we can guide you through the implications of the double taxation agreement for your country of residence, and assist with completing the necessary HMRC forms.
We can even pay your pension withdrawals directly into your local, non-UK bank account.
➤ Why MyExpatSIPP is the ideal UK Pension solution for non-UK residents
Speak to us about transferring your pension.