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.
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offered to pension holders by the UK government in April 2015 meaning that in most cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.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.
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.
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 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.
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.
German income taxes on residents apply to all income no matter the source country with 45% being the top rate over and above €250,731. A charge of 5.5% on the income tax is levied as a ‘solidarity surcharge’. Church tax is applied for church members.
Being domiciled or your habitual abode being in Germany constitutes residency. This is set at 6 months or more in any given year. Having permanent accommodation in Germany constitutes domicile.
Income sourced in Germany is taxed if the individual is a non-resident but not income sourced worldwide. Non-residents do not pay church tax. Income from pensions held abroad is not taxed for non-residents in Germany but it is for residents. In the case of non-residents drawing income from pensions abroad, there is no tax on remittances.
Residents of Germany with pensions abroad are subject to tax, as discussed, but there is no hard and fast rule. The pension income under German law, and actual foreign income are both taken into account.
Some private capital-based pension schemes are deemed as ‘other income’ because, although they provide income for life, they do not do so until the pension holder is 62. How much of the pension is taxed is dependent on the year of the first payment. If the pension holder began receiving payments in 2015, 70% of their pension income would be taxed.
Other private pension schemes are a little different. The income that is subject to tax can, for example, be taxed at the marginal rate dependent on how much more an individual is drawing in income than the invested capital can sustain over the individuals lifetime. This ‘excess’ is a percentage of the payment amounts and is influenced by the age of the pension holder when they started drawing their pension.
For tax residents in Germany, sums transferred as lump sums from foreign pension schemes (if eligible) are subject to 26.375% tax on the insurance premiums subtracted from benefits figure.
If the contributions to certified private pension plans were tax deductible, than former employees’ pensions are 100% subject to tax.
Lump-sums from foreign pension schemes are taxed as if they have a lump-sum option under the scheme. Therefore, a flat capital gains tax (including solidarity charge) totalling 26.375% applies. German tax law applies including any deductions, for example €1,602 for married couples.
For tax paid on income in foreign countries (with which Germany has a DTA), tax credits are paid. DTAs exist between Germany and approximately 90 countries - Malta and the UK included. Germany does not demand net worth or net wealth tax.
With regards to inheritance tax, foreign pension funds are not treated as a special case and there are not special provisions. The German Valuation Act dictates the assessed value of the pension fund which is subject to between 7% and 50% inheritance and estate tax, although there are exceptions.
If the member is a German resident at the time of death, the beneficiary is a resident at the time that the tax is levied, or either member or beneficiary is a German citizen having emigrated (if applicable) within 5 years prior to the taxable event; then the transfer of foreign property is subject to the above taxes.
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.
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.
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.
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.