A lower cost of living and access to high-quality healthcare are among the many reasons to consider retiring to Portugal.
But it’s vital to understand the benefits and risks of transferring your pension. We take a good look at the transfer process, the pros and the cons.
What is a QROPS?
A Qualified Recognised Overseas Pension Scheme (QROPS) is an overseas pension scheme approved by HMRC.
It’s essential that you select a QROPS from HMRC’s current list of approved schemes, or you could face tax charges of up to 55% on your transfer.
For funds of over £150,000, the QROPS is becoming increasingly popular, but other options, such as an international self-invested personal pension (SIPP) are worth considering for smaller sums.
To be eligible for the QROPS, you must be a UK national who is intending to move overseas, or who has already done so.
Most UK pension types can be transferred to a QROPS, except for the state pension, which is non-transferrable.
It’s worth noting that Portugal doesn’t have any local providers on HMRC’s list of Recognised Overseas Pension Schemes (ROPS), but you can transfer to a Malta QROPS and get your retirement benefits in Portugal.
What are the rules for transferring your pension to Portugal?
To move your UK pension to an approved Maltese QROPS, there are certain rules that must be met.
Here are the main rules:
Your scheme must conform to the definition in the HMRC’s Pension Tax Manual.
Your scheme must be an overseas pension created outside the UK and meet the regulations test by being taxed as an occupational scheme in another country.
Your scheme must be a ROPS.
It must pass a benefits tax relief test.
Tax treatment applies to residents and non-residents.
Benefits are payable from the age of 55, except in the case of illness.
What are the benefits of transferring your pension to Portugal?
It’s wise to have your pension in the same country or financial jurisdiction that you’re retiring to, so you can receive income and spend in the same currency and avoid currency conversion costs.
A key benefit is that you will be exempt from any changes to UK legislation.
Portugal also has the Non-Habitual Resident (NHR) scheme, which offers tax relief on a QROPS or international SIPP.
The scheme is specifically designed for expats who become EU tax residents as it provides tax reductions for up to 10 years.
As an EEA or EU citizen, you need a residential address with at least a 12-month contract if you’re renting and have not paid tax in Portugal for five years.
Once you’ve passed proof of residency checks, you can apply for NHR status and get all the benefits if you continue to meet the criteria throughout the 10-year term.
Here are the key benefits:
Income from your pension is taxed at a flat rate of 10%.
Any additional income from Portugal will be taxed at a capped rate of 20%.
It may be a good idea to reinvest your UK pension funds into alternative tax-efficient options.
Although there are advantages to transferring your UK pension into a Maltese QROPS and drawing your income in Portugal, there are some risks.
It's wise to seek financial advice so you can choose the best option for your retirement.
What are the drawbacks of transferring your UK pension to Portugal?
There are some disadvantages if you're planning on taking your pension out of the UK.
You relinquish any guaranteed retirement and death benefits attached to a defined benefit (DB) pension.
You will lose the protection given by the UK Pension Protection Fund to DB schemes.
You take on the running costs paid by your existing DB scheme.
You might pay higher charges than those levied by your defined contribution (DC) scheme.
While you have access to more investments via a QROPS, you are exposed to greater risk.
If you’re feeling overwhelmed about transferring your UK pension, an expert financial adviser may be able to offer guidance.
Can I get my state pension?
If you retire to Portugal, you'll receive your UK state pension if you have enough National Insurance contributions and are of retirement age. As the country is in the European Economic Area (EEA), it will rise in line with UK increases.
How do you transfer your pension to Portugal?
To transfer your UK pension to Portugal using a Maltese QROPS, there are several steps you need to follow.
Check if you’re eligible
Ensure that your pension meets the criteria for a QROPS and that your chosen Maltese QROPS is a registered scheme that meets HMRC’s qualifying criteria.
Choose your QROPS provider
You should do extensive research to find a reputable QROPS provider that’s right for you. You should consider many aspects including any fees and investment options when making your choice.
Tell your UK pension provider
You must let your UK pension provider know that you are moving to Portugal and plan to transfer your pension to a QROPS in Malta. They will send you everything you need to complete.
Complete and submit the transfer forms
Next, you must complete the transfer forms sent by your UK pension provider and QROPS provider in Malta.
Everything must be accurate and include any supporting information that is needed.
Then you should submit the forms to both providers.
Your UK provider will transfer your pension to the QROPS in Malta although this is subject to approval by HMRC.
What other financial issues should you consider when moving to Portugal?
It’s wise to consider more than transferring your pension before starting your new life in Portugal.
Here are some key financial considerations:
Your new home: It’s worth figuring out how you’re going to afford your new property in Portugal, whether it’s a mortgage, your savings or the proceeds from the sale of your current home. If you opt for a mortgage, a broker can help you work out exactly how much you can afford to borrow and for how long.
Address your tax affairs: HMRC must be told about your change in circumstances. A tax adviser can help you notify the taxman, organise your tax affairs and advise you on your pension, so you have peace of mind.
Inheritance: Once you own a property in Portugal, you should consider drawing up a will.
Make sure you’re insured: Make it a priority to find a good insurance provider for your home and vehicles and consider private medical insurance.
Open a Portuguese bank account: It makes a lot of sense to open a Portuguese bank account before you move to the country, so you’ll be able to transfer your money. Make sure you have several forms of ID ready.
Moving is expensive but it’s even more so if you’re starting a new life overseas.
It’s worth having a contingency fund so you can afford to search for your new home in Portugal, including money for transporting your belongings.
With the right preparation, you should be able to transfer your UK pension.
The country has much to offer expats such as the NHR scheme that make it tax-friendly for retirees too.