There were 39,000 UK-born people with residency in Portugal in 2014, according to the Portugal statistics agency which used figures reported by Portugal authorities. Of these, around one-third of them receive the UK state pension.
Aisa Group is registered for both insurance and investment advice for expats resident in Portugal.
Portugal Specific Pension Information
If you go to the UK Revenue and Customs site (www.hmrc.gov.uk ), you will be able to find both an English language version of the current UK-Portugal Double Taxation Treaty (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/500344/uk-portugal-dta_-_in_force.pdf ) ( Articles 18 and 19 refer).
KEY POINT: Pensions - the lump sum from a UK pension is taxable where the contributions are lower than the lump sum and should be declared.
Pension lump sum – could attract a 28% withholding tax if greater than contributions paid.
There are special rules for non-habitual residents (NHR). For more information go to our Tax Hub
Portugal Tax considerations
Portugal’s ‘non-habitual resident’ (NHR) scheme offers new residents special tax benefits. The NHR scheme allows you to receive foreign income tax-free. You could also pay no Portuguese gains tax you make from UK property. Those granted non-habitual residents (NHR) status will be given a tax exemption on all forms of taxable income they receive from abroad, including pensions and lump-sum withdrawals, for their first ten years in the country.
KEY POINT: Tax - The way in which you are registered for tax in Portugal ( NHR or resident ) is key to how you will be taxed. Tax advice is imperative.
Portugal offers a low income tax rate if you are employed in Portugal, which somewhat reduces the need for locking investment money up for years, or indeed pensions.
KEY POINT: For those expats who were advised to take out a QROPS or International SIPP and put the investment into an Investment Bond for tax efficiency reasons – you must review this arrangement.
For more information go to our Tax Hub
Portugal specific Investment Strategies
There is a saying ‘Don’t let the tax tail wag the investment dog’. Investors should be interested in the best strategy to get the highest net return after tax AND fees.
KEY POINT: If the fees for a tax strategy are higher than the tax saved, then it would be sensible to look at taxed options with lower fees. When we review existing products often recommended many clients would have been better off not taking out the supposedly “tax-efficient” investment bond! While NHR status may save tax in the first 10 years, any tax advantage could be reduced or wiped out by excessive fees and commissions.
The adviser should look at alternative strategies, suggest options to discuss with you, finalising a best solution for you, the client, based on investment, fees and the overall tax liability. There is a suggestion that the sale of non-compliant insurance bonds (whether outside a pension or not) will not enjoy any tax benefits and should be declared on tax returns, but certainly non-regulated investments do not come under any form of protection.
KEY POINT: Investments not regulated under EU rules will not be protected under the Financial Services Compensation Scheme. If these investments go bust then the client will lose all their money and have no protection.
Key issues / concerns
Investment bonds, when sold in a QROPS or International SIPP, are to be avoided. Some investment bonds can be helpful but only with EU regulated investments inside and a “clean” structure (no commissions).
The main consideration should be the balancing of tax efficient advice which takes into account future plans, and charges of products.
Investments not regulated under EU rules will not be protected under the Financial Services Compensation Scheme. If these investments go bust then the client will lose all their money and have no protection.
The taxation of pension lump sums is rarely mentioned but should be disclosed.
If the fees for a tax strategy are higher than the tax saved, then it would be sensible to look at taxed options with lower fees. When we review existing products often recommended in Portugal, many clients would have been better off not taking out the supposedly “tax-efficient” investment bond!
The vast majority of expat advisers (differ from regulated Portuguese advisers), providing investment or pension investment advice to UK expats, do not have investment licences and are circumventing this by selling insurance wrappers that are expensive and commission laden.
What should you be considering?
- If you are confident enough, then do your research, and place investment directly.
- If you need assistance, then seek advisers who are regulated themselves in the UK for pensions advice, and / or regulated for INVESTMENT advice in Portugal.
- Consider not only tax efficiency, but also costs!
- Point 4 – is, make sure the costs are accurate! If you are told the costs are 1% or 1.5% per annum in total and there is no fee up front, then you are probably being lied to in 95% of cases.
Some advisers, providing investment or pension investment advice, do not have investment licences and are circumventing this by selling insurance wrappers (investment bonds) that are expensive and commission laden.
- Don’t get taken in by the great claims over QROPS and Insurance bonds or investment platforms that are really investment bonds. These add layered charges and are usually not the best outcome for clients (although we accept that in around 15% of cases they are).
- Don’t be a sheep. Just because your best friend was advised to do something, never assume this is the right thing. Each person is an individual and requires individual solutions. If your friend were to walk off a cliff, would you follow them?
Our Empirical evidence from clients we have spoken has shown us that many expat sales advisers in Portugal, just sell a product to their clients for commission and do not provided financial solutions. The product is often a QROPS or an International SIPP or an investment bond, which may or may not be the best advice but this is not really considered. Don’t listen as 85% of the time you would be better off doing something else with your hard earned money or pension.