Do you have a UK registered pension and are you a tax resident in Germany?

If you are a tax resident in Germany and your pension is in the UK, you may be liable to pay tax in the UK. However, it might be possible to transfer your pension fund out of the UK into a Qualifying Recognised Overseas Pension Scheme (QROPS) and benefit from advantages.

If you leave your pension in the UK

If you leave your pension in the UK

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’ – either Defined Benefit or Defined Contribution.

Income Tax (UK) during the member’s lifetime

Income Tax (UK) during the member’s lifetime

More flexibility was offered to pension holders by the UK government in April 2015 meaning that in most cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.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, than non-UK residents are liable to pay UK income tax on those earnings as is the case for earnings of UK residents. If you have a pension in the UK, this is counted as UK source income and so you are taxed at your marginal rate on the 75% that is not included in your tax free sum.

However, 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 – choosing instead to pay tax where you are resident.

DTA between the UK and Australia

DTA between the UK and Germany

A DTA between Germany and the UK does indeed exist. This means that UK pension holders resident in Germany pay tax in Germany and are not taxed at source in the UK.

Pensions will be taxed in the UK only if contributions to the UK pension were tax relieved or deductible for more than 15 years. There are circumstances in which this will not apply and the UK relinquishes its right to tax. For instance; if the pension is not effectively taxed by the UK government; there has been claw-back of tax relief; or the individual made tax relieved and deductible contributions for more than 15 years in both Germany and the UK.

Government Service Pension Schemes are dealt with under different rules.

Pension benefits

Pension Death Benefits Payment – UK Tax

Legislation in April 2015 affects UK taxation on defined contribution scheme benefits. For instance, taxes on benefits are now influenced by whether the pension scheme member passes away before or after reaching 75 years of age. Passing pensions onto beneficiaries is now, in general, less costly. Marginal tax rates are still up to 45%.

Non-UK residents with a QROPS can, in some circumstances, pass on benefits at a lower tax rate when they die.

Gibraltar QROPS

Gibraltar QROPS

Gibraltar taxes of 2.5% apply to QROPS held in the jurisdiction as no DTA exists with Germany. UK income tax does not apply if the person has been non-resident for five years or withdrawals are below £100,000.

Inheritance tax does not apply in Gibraltar and you are protected from UK inheritance tax.

Gibraltar QROPS holders are protected from UK death benefit charges if the member is not, and has not been for 5 years previously, a UK resident.

Malta QROPS

Malta QROPS

A DTA exists between Malta and Germany meaning that annuities and payments providing a pension are taxed in the country of residence. QROPS pensions are taxed as described previously based on German residency and not in Malta. Government Service and Social Insurance Pensions are slightly different.

UK income tax does not apply if the person has been non-resident for greater than 5 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 5 years previously, a UK resident.

Tax Options

Leave the Pension in the UK

Leave the Pension in the UK

If the requirements of the DTA are satisfied, than no UK tax applies. If resident in Germany, tax is levied up to 45%. The pension fund will be subject to UK death benefit charges.

Gibraltar QROPS

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, if a German resident, up to 45% in Germany also. A German tax credit applies to mitigate the Gibraltar tax. This solution might be most efficient as a non-resident in the UK or in Germany. The QROPS protects from inheritance tax and (assuming 5 years as a non-resident in the UK) it will also protect from UK death benefit charges.

Malta QROPS

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 DTA with Germany means that, for German residents, no Malta tax applies as the tax is levied according to German tax law (up to 45%). The QROPS protects from inheritance tax in the UK (also with a ‘0’ rate of inheritance tax in Malta) and assuming 5 years as a non-resident in the UK, it will also protect from UK death benefit charges.

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This general information has been provided on the basis of our understanding of the current legislation in the UK, Gibraltar & Malta as of April 2015. Should any of the information provided be inaccurate, incomplete or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist multi-jurisdictional (where relevant) tax advice so that their individual circumstances can be fully considered.