If you are an expat and a tax resident in Switzerland with your pension in the UK, you may be liable to pay tax in the UK. However, with the right international pension advice, it might be possible to transfer your pension fund out of the UK into a Qualifying Recognised Overseas Pension Scheme (QROPS) allowing you to benefit from advantages. Our independent financial advice regarding transferring pensions offshore is specifically aimed at those who plan not to return to the UK as a resident.
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offered to pension holders in April 2015 meaning that in most defined contribution cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.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 between Switzerland and the UK stipulates that income from pensions to Swiss residents will be taxed in Switzerland only and not the UK.
However, lump-sums arising from UK pensions are treated differently. Lump-sums are taxed in the UK even if the individual is a resident of Switzerland.
Government pensions are treated slightly differently and you should consult your international pension adviser accordingly.
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 Switzerland. 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 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 at least 5 years previously, a UK resident.
Independent financial advice should be sought in all pension transfers to Malta. Switzerland and Malta do have a DTA in place which states that pensions will only be taxed in the individual’s country of residence and only if the pension is ‘in consideration of past employment’. QROPS do not fall under this in Malta and so we look to another provision of the DTA, the Other Income Article. This states that Switzerland alone will tax Swiss residents with Maltese pensions. This means that no tax is levied on the pension by Malta.
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.
What is a resident?
For Swiss tax residents, not all income is taxed. Exclusions include foreign business profits, profits from branches of Swiss businesses in other countries and profits from immovable property abroad. Beyond this, income is taxed no matter the source country.
For non-residents, taxes apply on income from Swiss business profits, profits from immovable Swiss property and Swiss employment but not other worldwide income.
Residency is defined by the following; if the individual wishes to move to Switzerland permanently e.g. their main interests (either business or personal) or:
The top rate of federal tax is 11.5%.
Each Canton (state within Switzerland) taxes income for their residents. Deductions are variable from the federal tax as well as income tax. Local rates are on a progressive basis where the maximum total inclusive of the Federal tax ranges between 23% and 44% depending on Municipality or Canton.
Some individuals can claim on the basis of ‘assumed annual living expenses’. This applies to those not earning from their activities as a first time resident (including temporary residents or those that have been absent for at least 10 years). In these cases, the assumed annual living expense is often decided case by case. The following elucidates basic factors in the calculation of taxable assumed expense:
January 2016 saw the arrival of new lump-sum tax rules. For example, the Federal tax base minimum is CHF 400,000.
How are foreign pensions taxed?
For QROPS transfers, the pension must fit the equivalent criteria for the Swiss occupational pension scheme for the beneficiary to receive any preferential taxation. This applies to both lump-sums and annuities. These criteria include the following (among others); individual schemes do not qualify, the scheme must enable collectivism, it must protect against disability or death, and the scheme should have had tax advantages in the first place.
The fewer differences between the foreign pension and Swiss scheme, the less likely it is to be rejected.
Assuming the scheme does qualify:
If the QROPS is an individual scheme or does not qualify for another reason yet the individual is a resident:
Other (inc. other DTAs)
DTAs exist between each EU state and Switzerland. DTAs also exist for approximately 50 other countries.
Tax credits, to alleviate double taxation, are not available for Gibraltar.
Net wealth taxes are normally levied by the member states / municipalities, not at a federal level. Likewise, inheritance tax and gift tax is charged at local level rather than at the federal level – estate tax less so.
Leave the Pension in the UK
With the exception of lump-sums, tax is charged in Switzerland on UK pensions and not in the UK as provided for by the DTA. The tax depends heavily on the Canton or Municipality but ranges from 23% in Zurich to 44% in Geneva. 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 Swiss resident, tax of up to 23% to 44% in Switzerland also. The 2.5% Gibraltar tax cannot be credited or claimed back. Growth in the investments may well be taxed as well as wealth tax from the local authority in Switzerland. 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.
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 pension is not taxed in Malta either as the DTA stipulates that, for Swiss residents, Swiss tax alone applies. Growth in the investments may well be taxed as well as wealth tax from the local authority in Switzerland. 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.
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.