British pensioners often have a problem making their pension stretch to cover their expenses, and then there is the dreaded UK winter lasting almost 7 months. Many pensioners choose properties in Spain and spend the European Winter there and afterwards return back to the UK for summer. This benefits many people, but the UK still taxes their pensions at source. With inflation reducing the buying power of essential items, why not evaluate some tax havens where UK pensions are only taxed at 5% and 15% respectively? Tax planning for retirement makes sense and always pays off!
There are two sun filled Mediterranean tax havens that offer UK pensioners a wonderful living standard and low taxes. Living in these locations by all means does not also preclude trips back to the UK to visit loved ones provided no more than 90 days are spent in the UK. These two jurisdictions are Cyprus and Malta.
Cyprus
Let’s investigate Cyprus first. The island is only a four-hour flight outside the UK. The cost of living is relatively low and rated as possibly one of the cheapest countries in Europe, which is a big advantage for immigrants from Western Europe, particularly pensioners. The infrastructure in Cyprus is well-developed with excellent communications and transport links. There are many restaurants, department stores and everything else required to make your home. Crime is also very low, there are outstanding schools and residency is easy to obtain for members of the EU.
Now let’s consider the rate of tax for pensioners. First of all due to the UK/Cyprus Tax Treaty British pensioners are only taxed at 5% with an annual exemption of Euro 3,420. This is a huge difference to what the UK will charge its pensioners. In the UK pensioners receive a tax-free allowance of £7,475 and 20%, 40% or even 50% income tax. However for pension incomes over £24,000 the tax-free allowance starts to reduce, making emigrating a more viable strategy for those with larger pensions. If a pensioner is between 65 and 74 in the UK the tax-free allowance is £9,940 and for over 75′s is £10,090 in the 2011/12 tax year.
On top of the aforesaid tax incentives there are many others. Income tax is free on interest received by individuals, 50% of interest income from companies, All Dividends, Profits from permanent establishments carrying on a trade abroad, profits in relation to the sale of shares and the income from employment services provided they are paid abroad to a non-resident employer. All this constitutes a very tax efficient environment to live.
Malta
The second most popular destination for UK pensioners seeking a cheap, warm and low tax environment is Malta. Although the standard of life in Malta is high, the cost of living there is surprisingly low, even cheaper than Cyprus! There are great recreational facilities like golf courses, numerous restaurants, the crime rate is very low. Medical facilities are rated 5th in the world by the World Health Organisation.
In Malta there is a Permanent Residence Scheme designed to attract well-off, non-working retired expats. At the time of writing this article, the scheme had been temporarily suspended, in December 2010, but will be open again at a later date. The main benefit of the rules is that income tax is taxed at a flat rate of 15%, with a minimum tax of Euro 4,200. Under the old rules it was compulsory to have an annual income of at least Euro 23,500 or assets of Euro 350,000 to entitle you for residency. Additionally, a resident had the ability to remit Euro 14,000 into the country annually, plus Euro 2,000 for each one of your dependents tax-free.
Other interesting taxation benefits are that overseas capital gains are tax-free and may be remitted tax-free to Malta. Overseas income that is not remitted is also tax-free. Remitted income is taxed at a marginal rate of 35%.