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

How the UK can help solve the semiconductor shortage
UK Economy

How the UK can help solve the semiconductor shortage

The EU’s plan to build a semiconductor manufacturing industry will fail, but the UK should take advantage of that, says Matthew Lynn
26 Sep 2021
The charts that matter: China upsets cryptocurrency markets
Global Economy

The charts that matter: China upsets cryptocurrency markets

Bitcoin slid again this week after China declared all cryptocurrency transactions illegal. Here’s what’s happened to the charts that matter most to th…
25 Sep 2021
How to cut your energy bill this winter
Personal finance

How to cut your energy bill this winter

Gas and electricity prices have risen by more than 250% so far this year. And they’re likely to go higher still Saloni Sardana looks at what can you …
24 Sep 2021
Cryptocurrency roundup: China’s crackdown intensifies
Bitcoin & crypto

Cryptocurrency roundup: China’s crackdown intensifies

Most major cryptocurrencies suffered falls this week as China cracked down even harder, while the Evergrande crisis rattled global markets, including …
24 Sep 2021

Most Popular

Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021