If you are an expat and a tax resident in the UAE 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offered to pension holders in April 2015 meaning that in most defined contribution cases, 25% of pension pots can be withdrawn tax free whilst the remainder (no matter drawdown, lump sum or annuity income) is taxed at the pension holder’s marginal rate of up to 45%.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 pension transfers is a potentially complex business and we would always recommend bespoke independent financial advice to expats considering this option.
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 the UAE. 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. The UAE and Malta do have a DTA in place which states that pensions will be taxed in the individual’s country of residence (the UAE) and not in Malta. No income tax is levied in the UAE.
Residency in the UAE is defined by the Residency Article and includes residents who are nationals and non-nationals as well as domiciled individuals. For non-Emirati residents, a tax residency certificate must be requested at the UAE Ministry of Finance although this is not guaranteed if the individual is no longer actively employed.
The DTA provides for pensions not ‘paid in consideration of previous employment’ as well as those that are. Therefore such remuneration is taxed in the same way. Malta considers QROPS to fall under this definition (not paid in consideration of past employment) but this does not matter in this case given the provision of the DTA. UAE residents are not taxed on foreign pensions in Malta or the UAE no matter the type of pension.
Malta levies taxes of up to 35% if the individual is not a resident of the UAE.
Maltese Social Security and Government Pensions are treated differently but are not relevant to QROPS.
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.
The UAE 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.
The UAE has approximately 60 DTAs in place.
If you are employed by a sponsor or are the spouse of an employee, than you are normally considered a resident and will hold a residency card. UAE nationals can sponsor the residency of family members from elsewhere. Because residency is typically linked directly to employment and their professional sponsor, there is a strong possibility that once an individual retires, they will lose their residency status. In the case of a QROPS in Malta, this means that taxes are levied up to 35% in Malta. The tax residency certificate for the UAE is necessary for the individual to benefit from the DTA – again this may not be available to retirees.
It is not necessary to be a national to purchase property in the UAE. If property is owned, it might be possible to hold the assets within a Qualifying Non-UK Pension Scheme (QNUPS). The UAE will not levy tax on the individual however, registration fees may be incurred upon transfer. All Muslims’ assets are subject, in the UAE, to Sharia law when they die no matter which country they hail from. Non-Muslims’ assets, if they died testate, can be distributed according to the Will even if signed abroad.
Leave the Pension in the UK
If the pension stays put in the UK, and the individual is a resident of the UAE, then UK taxes apply to pension income. Death benefit charges still apply to funds in the UK.
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 the UAE 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.
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 the UAE providing they are a resident and fulfil the DTA criteria. If the individual is not a resident in the UAE, 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.
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.