How to have a low-tax retirement in the sun

(Image credit: © Getty Images)

published 20 July 2020

Want to live a very low tax retirement? Good news: you can. The Greek finance ministry has submitted a draft law to its parliament that will allow it to offer a ten-year tax incentive to foreign pensioners.

It’s a good one: move to a sunshine island and not only will your vitamin D levels shoot up without the need for pesky vitamin supplements (one reason, perhaps, why there have been under 200 deaths in Greece) but your income tax liability will fall to a flat rate of 7%. Better still for those who have favoured, say, buy to let over Sipps, that’s not just on actual pension income, says Alex Patelis, chief economic adviser to the PM, “but to whatever income a person might have, be that rents or dividends as well as pensions.” Sounds good doesn’t it?

The logic is very simple, says the finance ministry: “we want pensioners to relocate here… we have a beautiful country, a very good climate so why not?” Why not indeed.

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Unfortunately the rest of the EU have an answer for that: they don’t like it. They don’t like intra EU corporate tax competition (just ask Ireland and Apple). And they don’t much like personal tax competition either. Post-financial-crisis Portugal had a go at something similar – offering ten years of 0% tax on all pension income for pensioners settling in the country. This was hugely popular with other EU pensioners – and UK pensioners in particular, given that under pension freedoms all withdrawals however large count as income (here’s what we wrote on it in 2015). All financial advisers will be able to tell you a story about a client moving to the Algarve, removing every penny from their pension income tax free and coming back a few years later.

The UK Treasury probably hasn’t been particularly keen on this. Pension tax relief is supposed to be tax deferred, not tax avoided. You get to save now income-tax-free and have your gains roll up capital-gains and dividend-tax-free. But on retirement you are supposed to pay tax on anything over your annual allowance, just like everyone else – that way the Treasury both incentivises you to save (or that’s the idea, anyway) but also claws some of that incentive back later. If people and their pensions leave the country to pay little or no tax elsewhere, the numbers don’t add up (or add up even less than they currently do).

The rest of the EU – and the high tax Scandinavian nations in particular – have been even less impressed. Faced with losing significant amounts of the tax they like to get from their baby boomers, Finland has gone so far as to cancel its tax treaty with Portugal (most EU countries have reciprocal tax deals so no one is double taxed) such that private-sector incomes sourced in Finland but paid to Portuguese residents are now to be subject to Finnish levels of tax. Several other EU countries are considering similar measures. Portugal, in a sort of capitulation, now says it will charge new “non habitual residents” 10% on their pensions.

Still, 10% is a pretty good offer – if you liked Portugal you’d probably still take it over the extra three percentage points off in Greece. Otherwise you might sit back and see what comes in next.

If there is a rush to Greece (as there was to Portugal) others of the less-rich EU nations might decide to enter the fray with a new bid for the boomer loot. And as Patelis says, why not? Membership of the eurozone has made it hard for the poorer nations to attract short and long-term visitors in the way they used to – relatively weak currencies used to mean attractively high living standards for those coming from stronger currency countries to live or holiday, and low wage costs for those coming to set up companies. So they are finding new ways to get them in. As long as they are allowed to use tax to do so within EU rules, they will.

The risk for the likes of Greece and Portugal is an EU clampdown (although that hasn’t worked yet in the case of Ireland). However, the fact that formal and informal tax harmonisation remains a risk for EU countries (deeper integration has to mean proper fiscal union) should be a nice reminder that it is also an opportunity – for the UK outside the EU.

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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.