If your pension remains in the UK, you may have UK tax obligations.
You could do better if you transfer your pension funds out of the UK.
Such a transfer into a Qualifying Recognised Overseas Pension Scheme (QROPS) requires qualified advice.
Here's an overview of your options...but if you have specific questions, don't hesitate to contact us and we'll help.
From 6th April 2006, the rules for UK pension schemes including; retirement annuity contracts, small self-administered schemes, self-invested pension plans, personal pensions and occupational schemes; have been consolidated under ‘Registered Pension Schemes’.
These come under either Defined Benefit or Defined Contribution Schemes.
More flexibility was offered to pension holders in April 2015 meaning that in most defined contribution cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.
If income is sourced in the UK, as is the case with a UK pension, then even non-UK residents are liable to pay UK income tax on those earnings in the same way as UK residents. Your UK pension, counted as UK source income, will therefore be taxed at your marginal rate. Tax is applied to the 75% that is not included in your tax free sum.
A Double Tax Agreement (DTA) between the country in which you are resident and the UK can mean that you are exempt from UK tax. If the DTA exists between the country in which your pension is held and the country in which you are resident, than you can choose, instead, not to pay tax where your pension is held in favour of being taxed where you are resident. International pensions transfer is a potentially complex business and we would always recommend bespoke independent financial advice to expats considering this option.
The DTA that exists between the UK and Bahrain stipulates that any pensions or income ‘in consideration of past employment’ (including annuities) are taxed in Bahrain if the individual is resident there, not the UK.
Government pensions are treated a little differently. Professional international pension advice should be sought in all cases of international pension transfer. Your international adviser should be able to assist with this issue among others.
Legislation in April 2015 affects UK taxation on defined contribution scheme benefits. For instance, taxes on death benefits are now influenced by whether the pension scheme member passes away before or after reaching 75 years of age. Passing pensions onto beneficiaries after the death of the pension holder is now, in general, less costly. Tax rates are still up to 45% in some cases.
Non-UK residents with a QROPS can, in some circumstances, pass on benefits at a lower tax rate when they die. Independent financial advice with a qualified pension specialist should be sought for individual cases.
Gibraltar taxes of 2.5% apply to QROPS held in the jurisdiction as no DTA exists with Bahrain. UK income tax does not apply if the person has been non-resident for at least five years or withdrawals are below £100,000.
Gibraltar QROPS holders are protected from UK death benefit charges if the member is not, and has not been for at least 5 years previously, a UK resident.
Independent financial advice should be sought in all pension transfers to Malta. Bahrain and Malta do have a DTA in place which states that pensions will be taxed in the individual’s country of residence (Bahrain in this case) instead of Malta. The highest rate of tax in Malta is 35% of the individual does not meet the residency requirements.
Government Service Pensions are treated differently.
UK income tax does not apply if the person has been non-resident for at least five years or withdrawals are below £100,000.
Inheritance tax does not apply in Malta and you are protected from UK inheritance tax.
Malta QROPS holders are protected from UK death benefit charges if the member is not, and has not been for at least 5 years previously, a UK resident.
Bahrain does not levy personal taxes on the individual. There is no requirement to comply with tax laws or to declare income for tax purposes.
Consistent with no personal taxes being levied, there are no net wealth, net worth gift or inheritance taxes.
QROPS transfer is entirely tax free as are the benefits and growth. Death does not attract taxes on the pension either.
Bahrain has a total of 44 DTAs in place.
If you are employed to work in Bahrain, than you are normally considered a resident and will hold a residency permit. No other domestic laws apply with regards to residency.
For the definition of residency, the DTA for each specific country must be consulted.
The UK demands that a Bahrain resident has their ‘vital interests’, ‘habitual abode’ or permanent home in Bahrain.
Malta demands that the individual must be a National of Bahrain and that they be present in Bahrain for 183 days of the tax year in question. They also make allowances for anyone liable for taxation in Bahrain under Bahrain law and who live in the country, but a tax residency certificate will be difficult to obtain for proof to Maltese tax officials. In summary, it is likely that only Bahrain Nationals would be able to hold a Maltese pension whilst paying tax in Bahrain under the DTA.
You have 3 main options:
1) Leave the Pension in the UK:
If the pension stays put in the UK, and the individual is a resident of Bahrain, then UK taxes do not apply to pension income. Death benefit charges still apply to funds in the UK.
2) Transfer to a Gibraltar QROPS:
For those members who have been non-UK residents for five years or more, transferring a pension to a Gibraltar QROPS will mean not being exposed to UK taxes on income of up to 45%. The member will pay 2.5% tax in Gibraltar and zero tax in Bahrain providing they are a resident. The QROPS protects from UK inheritance tax and (assuming 5 years as a non-resident in the UK) it will also protect from UK death benefit charges.
3) Transfer to a Malta QROPS:
Again, assuming the member has been a non-UK resident for five years or more, this option will ensure the pension is not subject to income tax (up to 45%) in the UK. The member will pay no tax in Malta and zero tax in Bahrain providing they are a resident and fulfil the DTA criteria. If the individual is not a resident in Bahrain, taxes of 35% apply in Malta. The QROPS protects from inheritance tax in the UK (also with a zero rate of inheritance tax in Malta) and assuming a minimum of 5 years as a non-resident in the UK, it will also protect from UK death benefit charges.
We believe the above taxation information is accurate, however tax rates and rules can change, and we are NOT tax experts. Therefore, please do not rely exclusively on the information to determine your liability for tax.
Speak to a local tax expert for personalised advice, or consult an international taxation consultancy.
If you'd like our help with regard to your expat pension options, please get in touch and we will do all we can to help.
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