Taxation on Foreign overseas Pensions Guide

Taxation on Foreign Pensions

For some professionals, working overseas is a critical component for the growth of their careers. This means that such persons may over the years accumulate significant retirement savings abroad. The big question is “How will these retirement benefits and pensions be taxed once they come back home to the UK to retire?”

The tax obligations could vary depending on how much a person accrued in retirement benefits and savings during that time and the country where they accumulated such savings, the type of retirement provisions employed and the manner of distribution of such benefits. You may have pensions in the US or Europe and its important to assess the tax and look at tax planning solutions before making that choice.

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Combined with the fact that there have been changes made to the tax obligations for persons with non-UK retirement benefits, things have become more complicated.

Determining the Nature of Payments

Before providing any advice, the first thing the adviser needs to do is to determine that nature of the client’s benefits. This article analyzes the treatment of pension earnings made while a professional is working abroad. However, it is possible that such a professional might also have other income while they are in retirement.

Different jurisdictions have different ways of encouraging people to save for retirement and not all of such schemes may have the structure or characteristics of what would be considered a pension scheme in the UK.

In some countries, the benefits may include end of service awards, savings schemes or deferment of receipt of employment income. All of these may be treated differently in the UK when they are declared as pension benefits.

The second part of this article makes the assumption that any of the retirement benefits the professional is earning come from a regime that may be regarded as a pension scheme in the UK, even if it is not registered.

Taxation of Lump Sums from a Foreign Pension Scheme

Generally, a person resident in the UK would have to pay income tax on any lump sum payments they get from their foreign pension scheme.

By and large, such lump sums will be fully subjected to income tax regulations.

While the basic premise is that the lump sum will be subjected to income tax, there is need to take into account exemptions that may reduce obligations, given that the professional accumulated the benefits when they were not living in the United Kingdom.

Reduction of Obligation for Foreign Service
You could get a partial reduction or complete exemption of income tax obligations for pension savings that a person might have accrued while working abroad in the Foreign Service.

The FA of 2017 made recent changes to relief for Foreign Service workers and the details of these changes are set out below.

Getting Relief through Invoking a Double Taxation Agreement

The United Kingdom has many Double Taxation Agreements (DTAs) with many countries and these DTAs have articles governing how pension income will be taxed. The pension article in a DTA will typically grant taxation rights to one country and exclude the other. As such, it will be critical to establish when and where the individual was resident in when the pension benefits were accumulated, and what the DTA stipulations say regarding the tax obligations on their pensions.

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