How to cut your income tax bill to zero

A loophole in the new pensions legislations might just mean you could put your feet up in the sun while enjoying all the money in your pension free of tax.


You could have a tax-free retirement in the sun maybe

A depressing bit of research arrives from Fidelity. It turns out that one in ten people still think that after pension freedom day' (fast approaching in April) they will be able to withdraw 100% of their pension pot entirely tax free.

42% of people either fall into this category or have no idea at what point their withdrawals begin to be taxed (only the first 25% comes tax free) and a full 45% of those planning to take out more than 25% in cash "do not understand the tax implications of doing so."

These people, says Fidelity's Alan Higham, are in for a "huge surprise when their bill arrives from HMRC". Instead of getting their money tax-free, they will find they have to pay income tax on it at their marginal rate.

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We've been thinking a bit here about how to make that huge surprise go away. And, prompted by a reader comment under a previous post, we think we might have an answer: what if you moved to Portugal and made yourself a resident there for tax purposes during the year in which you want your money?

This makes sense for the simple reason that all withdrawals from UK pension wrappers are treated as income, and that in Portugal it is possible that any income from your pension could be paid free of income tax (income from public sector pensions is excluded from this).

Yes, you read that right: in Portugal there are special rules for non-habitual residents drawing money from occupational pensions, which effectively allow them ten tax-free years of residency. So while resident there (this should be very straightforward to establish as long as we are all in the EU) you could withdraw the lot tax-free from a suitable pension and do with it what you like.

Say you had £400,000 in a pension. If you took it out in the UK as one lump sum, your income tax bill (assuming you had no other income that year) would be £121,000. In Portugal it would (we think) be zero.

This requires professional financial advice, but if all went well, you'd end up with £400,000 in cash. Then what? Put your feet up, I say. And order some of that nice pink wine. Maybe with the bubbles.

PS There is bound to be a flaw in this excellent sounding plan. I invite readers to tell us what it is.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.