A depressing bit of research arrives from Fidelity. It turns out that one in ten people still think that after ‘pension freedom day’ (fast approaching in April) they will be able to withdraw 100% of their pension pot entirely tax free.
42% of people either fall into this category or have no idea at what point their withdrawals begin to be taxed (only the first 25% comes tax free) and a full 45% of those planning to take out more than 25% in cash “do not understand the tax implications of doing so.”
These people, says Fidelity’s Alan Higham, are in for a “huge surprise when their bill arrives from HMRC”. Instead of getting their money tax-free, they will find they have to pay income tax on it at their marginal rate.
We’ve been thinking a bit here about how to make that huge surprise go away. And, prompted by a reader comment under a previous post, we think we might have an answer: what if you moved to Portugal and made yourself a resident there for tax purposes during the year in which you want your money?
This makes sense for the simple reason that all withdrawals from UK pension wrappers are treated as income, and that in Portugal it is possible that any income from your pension could be paid free of income tax (income from public sector pensions is excluded from this).
Yes, you read that right: in Portugal there are special rules for non-habitual residents drawing money from occupational pensions, which effectively allow them ten tax-free years of residency. So while resident there (this should be very straightforward to establish as long as we are all in the EU) you could withdraw the lot tax-free from a suitable pension and do with it what you like.
Say you had £400,000 in a pension. If you took it out in the UK as one lump sum, your income tax bill (assuming you had no other income that year) would be £121,000. In Portugal it would (we think) be zero.
This requires professional financial advice, but if all went well, you’d end up with £400,000 in cash. Then what? Put your feet up, I say. And order some of that nice pink wine. Maybe with the bubbles.
PS There is bound to be a flaw in this excellent sounding plan. I invite readers to tell us what it is.