This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
This article gives information about paying pensions from UK registered pension schemes to individuals who are living outside the UK, either at the time the pension comes into payment or when they later move abroad. Reference to pensions in this article include payments of secured pensions (both lifetime annuities and scheme pensions), income from drawdown arrangements and taxable lump sums, as the same issues will apply to each with regard to payment options and taxation.
How benefits are paid to an individual living abroad will depend on the scheme rules and/or provider. The following options may be available:
- payments are made to a UK bank account that the individual still holds.
- payments are sent by cheque to the individual’s home address in their country of residence.
- payments are made directly from the UK to a bank account in the individual’s country of residence. Note – there is a system in place to help speed up international payments using International Bank Account Numbers (IBAN), Society for Worldwide Interbank Financial Telecommunication codes (SWIFT) and Bank Identifier Codes (BIC). This is an internationally agreed method for transactions between banks located in different countries. It was originally introduced within the European Union but has since spread to other countries. However, not all countries currently use it.
With all of these options, tax rates, exchange rates and bank transaction costs will affect the amount of money the individual actually receives.
The majority of pensions paid in the UK are taxed in the same way as earned income which means that they are paid and taxed under the PAYE system. The correct amount of tax is deducted from each payment, taking into account the individual’s tax code. When an individual moves abroad they are likely to become non-UK resident and a non-UK taxpayer. However, they may become liable for tax in the country in which they now live. As a result, they could end up paying tax twice on their pension payments – when the UK provider processes the payment, then again on receipt in the country they live in. However, many individuals may be able to avoid paying double tax in full or to a certain extent, in the following circumstances:
- if the individual is living in a country with which the UK has a double taxation agreement, and the agreement exempts UK pensions from some, or all, UK tax then they can contact HM Revenue & Customs (HMRC) to arrange for payments to be made either without tax deducted, or with tax deducted at a reduced rate. This could mean that the payments would only be taxed once, on receipt in their country of residence. The UK has double taxation agreements with many countries and a list of them is held in the Digest of Double Taxation Treaties document. To check the position for a particular country, find it in the digest then read the information under the ‘Other pensions/annuities’ column.
- if the individual is living in a country with which the UK doesn’t have a full double taxation agreement, they may be able to claim UK personal allowances which can reduce the amount of tax due to be paid. You can read more information on the Government website. HMRC form R43 is available for this purpose. The form, and more information on how to make a claim, can be found at: R43 - form and guidance.
Any lump sums paid tax free from a UK pension scheme may be taxed in the individual’s country of residence if they are resident abroad at the time of receipt.
An individual or their adviser should complete a claim form and have it approved by the tax authorities in the country where they live before sending it to HMRC. On receipt of the form, HMRC will then instruct the UK pension provider to make gross payments or to apply a reduced tax rate. If this is not organised before any taxable payments are made, it is possible for an individual to claim a refund of any overpaid tax.
Separate claim forms are available for residents of all countries with which the UK has a comprehensive double taxation agreement. If the country of residence isn’t one of these then a standard claim form should be used. All the claim forms can be accessed in the section headed ‘How to claim tax relief’ at: https://www.gov.uk/tax-uk-income-live-abroad/taxed-twice.
There are tax considerations for individuals living overseas who want to bring UK retirement benefits into payment. Anyone in this position may want to seek financial advice before drawing their benefits to make sure they’re taken in the most tax-efficient way and that any available reliefs or exemptions are obtained.