How to have a low-tax retirement in the sun

Greece is to offer a ten-year tax incentive to foreign pensioners. That’s a pretty good offer, says Merryn Somerset Webb. But it might not last.

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.

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.

Recommended

Will a stronger euro ruin Europe's rally?
European stockmarkets

Will a stronger euro ruin Europe's rally?

International investors have been buying into European stocks, driving the euro higher. But that surge now risks dampening the recovery that started i…
21 Sep 2020
Mind the inheritance-tax trap when transferring your pension
Pensions

Mind the inheritance-tax trap when transferring your pension

Transferring your pension could incur inheritance tax for your heirs, says David Prosser.
9 Sep 2020
How to fight the fraudsters coming for your pension pot
Personal finance

How to fight the fraudsters coming for your pension pot

Investment and pension scams have proliferated during lockdown. Here’s how to protect yourself.
8 Sep 2020
No deal is the best deal for Britain – and the EU too
Brexit

No deal is the best deal for Britain – and the EU too

Europe has a lot to gain from a thriving, independent Britain, says Matthew Lynn.
6 Sep 2020

Most Popular

The rising dollar is proving bad news for most other assets – will it last?
Investment strategy

The rising dollar is proving bad news for most other assets – will it last?

Precious metals, stocks and pretty much every other asset has taken a tumble as the US dollar strengthens. Dominic Frisby looks at how long this trend…
23 Sep 2020
Oil producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020
Why you should stuff your end-of-pandemic portfolio with Chinese stocks
China stockmarkets

Why you should stuff your end-of-pandemic portfolio with Chinese stocks

For an end-of-pandemic portfolio, you need assets that can cope with today’s volatility. And that, says Merryn Somerset Webb, means Chinese stocks.
14 Sep 2020