As the end of the tax year passes, many people’s thoughts turn to their finances. If you’re planning to retire this tax year, being strategic with which month you do so could save you money.
Wealth Management experts, Chase Buchanan, share their advice on the best time of year to retire, particularly if you plan on moving abroad for retirement.
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When is the tax year?
In the UK, the tax year runs from 6th April to the 5th of April every year. There are several things you must do before the tax year comes to end, depending on whether you are employed or self-employed, such as submitting your tax return and paying your tax bill.
When is the best time of the tax year to retire abroad?
The start of the UK tax year is a great time to move abroad for retirement.
The main reason is that your taxable income will be lowest at the start of the tax year.
The standard Personal Allowance in the UK, which is the amount you can earn before you pay any tax, is £12,570. Any income you earn above this amount becomes taxable income. There are different tax bands depending on how much you earn. Lower earners are taxed at 20%, while higher earners are taxed at either 40% or 45%.
Pensions are classed as taxable income, just like a salary is, and will be given to you on top of any other income you’ve earned that year. So, to avoid being pushed into a higher tax band, you’ll want to keep your other taxable income as low as possible.
By retiring and taking your pension at the start of the new financial year, you will have no, or very little, additional income and your pension could be taxed at 20% rather than 40% or 45%.
Of course, this does all depend on how much you have in your pension pot.
Considering tax residency when retiring abroad
Depending on your destination country and its tax rules and rates, you may want to consider which country to claim tax residency in when you first move, and plan your moving date accordingly.
If you want to claim tax residency in the UK for the tax year, you will need to leave around mid-October. This will ensure you have stayed in the UK long enough in the tax year to class as a tax resident.
Then, when you arrive in your new country, you will need to submit a P85 back to the UK which will confirm your non-residency from the relevant date. You may also be able to get a tax rebate for some, or all, of the tax you have paid that tax year.
Maintaining tax residency in the UK when you first move abroad will also enable you to take advantage of the UK’s 25% tax-free cash on pensions. To do this, you will need to file a DT (double taxation treaty) form back to the UK which will enable you to get an NT (no tax) code from HMRC. This will then be applied to your UK pension payments in order to get them paid gross (i.e., no UK income tax deducted).
After this, you will become a tax resident of your new country of residence and will begin paying the appropriate tax on your gross pension.
How can you protect your pension from currency movements?
When you receive your pension overseas, you’ll be paid in local currency. This means the amount you receive may vary depending on the currency exchange rates.
Exchange rates are highly sensitive and can fluctuate considerably between months, weeks and even within a single day. They can be affected by anything from financial data to politics and current affairs.
In the last 12 months, the fluctuating GDP/EUR exchange rate has meant that £100,000 has varied by over €8,000 – a substantial amount of money that could be put towards your retirement in the sun.
While it is impossible to predict where the exchange rates will go, this uncertainty can be easily mitigated with the help of a currency specialist.
Smart offers several services to help you manage currency risk and protect your pension. These include forward contracts, which allow you to lock in a strong rate for up to 12 months, and a regular payments plan for frequent overseas transfers, such as a pension.
Contact our team on +44 (0)20 7898 0541 or fill in this short form for more information.