[Written by Robert Hallums]
With the strong pound vs the euro, promise of golden sunshine and a relaxed way of life, retiring to Italy is now a realistic prospect for many British people.
Until recently, planning to retire to Italy from UK involved making long term decisions about which annuity to purchase to draw an income from your pension. With the recent pension reforms, people with private pensions are now able access their entire pension pot as soon as they reach 55.
However, while the headlines are appealing, there are a number of factors regarding any pensions which need to be considered by Brits before retiring to Italy.
Tax on your pension before you retire to Italy
Even before the pension reforms it was possible to withdraw up to 25% of your pension tax-free. Since the pension reforms it is now possible to withdraw your entire pension. If you were to do so, the initial 25% would still be tax free while the remaining 75% will be taxed as if it were a salary at your standard income tax rate.
It is also key to understand that if you withdraw your entire pension in a single month, you may be charged emergency tax on the withdrawal. This is because you will be taxed as if you were receiving that same income each month.
You will be able to claim that tax back before the end of the tax year, either through a P50 or P53, otherwise you will receive a tax rebate once the tax year has ended.
Withdrawing your entire pension as a lump sum may not be the most prudent way to go, even if it is appealing to have a large lump sum to buy your dream property in Italy in your favourite destination among the many Italian locations which are perfect for spending your retirement years.
Tax on your pension when you live in Italy
Even if you have retired to and become a tax resident in Italy, UK pensions are deemed as income originating from the UK. This means that you are subject to UK tax rules on the income you receive from your pension in the UK as well as in Italy. However, the UK has a double taxation agreement with Italy which means that you can claim tax relief from tax paid in the UK meaning you will only be liable for income tax in Italy.
If you move to and become a tax resident in Italy with money in a private pension, unlike in the UK, if you take lump sum from your pension the full amount will be liable to income tax in Italy, the first 25% included.
As there is also no tax allowances in Italy, any income you receive from your pension will be subject to Italian income tax. This includes additional local taxes, the amount of which varies depending on the region of Italy you reside.
The impact of currency fluctuations
If you decide to keep your UK pension and draw an income from it, any payments will be in GBP and therefore at risk from currency fluctuations. As was experienced by pensioners across Europe, the recent financial crisis has had a significant impact on the exchange rate between the euro and the pound.
As of May 2015, the exchange rate is favourable for retirees living in Europe drawing an income from UK pensions, at some point in the future this is likely to change. If and when the pound does devalue, your pension will actually be worth less in Italy.
Drawing an income from a UK pension also means that you will also be subject to transaction fees every time you convert your GBP to Euros.
Transferring private pensions to a QROPS
With the pension reforms, some of the benefits of QROPS have diminished which have typically made them more suitable for larger pension pots as a result of the fees and commissions.
However, for people with larger pensions, there are still notable benefits to transferring to a QROPS. The primary benefit is that the pension is no longer subject to UK rules and regulations.
Secondly, you can choose the currency of your QROPS meaning that you are less vulnerable to currency fluctuations and transaction fees. While this may seem a relatively trivial element, if you are planning to spend the rest of your life in Italy, it could save you money in both the short and long term.
Finally, the location of the QROPS is important as some countries (including Gibraltar) do not have a double tax treaty with Italy. In cases where there is no tax treaty, you may be able to claim for tax relief and therefore not be required to pay tax at source.
In all cases you will be required to pay income tax in Italy at the appropriate rate.
State Pensions
If you are eligible to receive a State Pension from the UK, you will still be eligible to receive it in Italy. To receive your pension, you will need to contact the International Pension Centre. You will also be required to complete a Life Certificate from time to time. This certificate tells the UK Government that you are still alive, failure to do so will mean that state pension payments will cease.
Get advice about your pension
As with any financial or relocation decisions, it is vital that you seek independent advice before taking action. The wrong decision could turn out to be very costly and have a serious impact on your retirement plans.
If you are considering retiring in Italy, or have already made the move and are wondering what to do with your pension, you should seek help from an independent financial adviser.
Robert Hallums writes for Experts for Expats, a very informative website where you can find must have information for all people who live or would like to move abroad. So wherever you’d like to live in the world, make sure you have a look at Experts for Expats first!
