Pensioners in Portugal: all sun and no tax

It sounds great; a cheaper cost of living, a sunny climate, great golf courses for those so inclined, not to mind a potentially tax-free retirement.

However, upping sticks and moving to another country, such as Portugal, is never an easy move – particularly at a later stage in life. Moreover, the tax-free benefits on offer can be complicated for Irish people to access, depending on how their pensions are structured.

But if you’d like a bit of the good life in your old age, what do you need to consider?

Why Portugal?

There are a number of reasons why Portugal might appeal to Irish retirees. For one, as our table shows, it’s a lot cheaper to live there, with value to be had even in the Algarve, particularly when compared with prices in Dublin.

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Rent, for example, is more affordable, at about €1,000 a month for a three-bed apartment in Albufeira, compared with almost €3,000 in Dublin. It also has a sunny, benign climate, great golf courses and great beaches.

And, as it's in an EU country, as Christina Hippisley, general manager of the Portuguese Chamber of Commerce notes, any Irish person in possession of an E111 card has the right to Portuguese healthcare to the same standard as the Portuguese. There is also the option of taking out private health insurance to access the large network of private hospitals that have set up in the country.

What Portugal also has is a preferential tax regime for retirees. In 2009, the Portuguese government introduced an exemption – the non-habitual residents (NHR) regime – which allows you to pay no tax on foreign sources of income for the first 10 years.

Introduced after the financial crash and subsequent euro-zone crisis, the aim of the regime is to encourage foreign residents to relocate to Portugal, bringing their wealth with them.

Double tax

Residents of countries that have double tax agreements with Portugal – including Ireland – are eligible to apply for the regime, but they must move to the country and also have an interest in a property there. You don’t, however, have to purchase one: renting is sufficient.

The regime means you can effectively live tax-free off the proceeds of your pension, saving yourself a considerable amount in the process. After 10 years you will be taxed at Portugal's marginal rates.

It’s been suggested that, to date, between 9,000 and 12,000 people have moved to Portugal – a number of them Irish – to avail of the NHR regime. It has been particularly popular with the British, the French and the Swedes.

“We see a fast-growing interest from Irish people looking to move,” says Hippisley, noting that Irish people are once again back buying property, particularly on the Algarve, and thinking about a retirement in a warmer climate.

She is hoping there is significant interest among Irish people as she’s bringing the “Moving to Portugal” roadshow to Dublin on May 15th.

"People are doing it," agrees Alan Murray, a private client tax partner with Mazars, though he adds that it's not widespread and the regime is still somewhat "under the radar".

To qualify for the non-habitual resident regime, applicants have to stay in Portugal for 183 days, though Hippisley notes that the authorities aren't too rigorous in their checking of this.

“The Portuguese don’t really care if you’re in Portugal, Spain or Italy,” she says, although, of course, ex-pats will have to be careful of returning home too often, or they could be pulled back into the Irish tax net.

Tax free?

Well, that very much depends. While the Portuguese tax regime provides for tax-free income for 10 years, the Irish Revenue also has to clear this income leaving this State tax free. And it doesn't always do so.

For example, if you're a member of a defined benefit pension scheme, and will be drawing down an annuity in retirement, the Revenue is likely to grant you a PAYE exclusion order, which means you will only be liable for income tax in the country in which you reside – which, in the case of Portugal, may be zero.

However, if you're in the more prevalent defined contribution scheme and are looking to put money into an approved retirement fund (ARF) for your pension, or if you have a vested PRSA, Revenue won't issue an exclusion order. This is because it doesn't deem drawdowns from such structures as pension payments. So, even if you move abroad, PAYE will still be withheld from your deductions.

Of course, you could just purchase an annuity rather than an ARF with your lump sum, but given interest rates, this is very unattractive for the moment.

You'll need to have a substantial pension fund to make a tax-driven move worthwhile

Similarly, if you’re a recipient of a public-sector pension, you won’t be able to transport this tax free either.

It's also worth bearing in mind that Irish income-tax rates decline considerably for those aged 66 and over; so you'll need to have a substantial pension fund to make a tax-driven move worthwhile. "It only applies to certain types of people," agrees Mike Shannon, a financial planner with Imperius Wealth.

Move your fund

One way around this is to transfer your pension to a Maltese-based personal pension. Under such a structure, the income in a pension fund is paid gross to member, and the tax is then paid in the country of residence. A double taxation treaty between Malta/Portugal means an Irish person could move their pension to Malta and draw it down tax free under the NHR regime in Portugal.

Shannon notes that moving your pension fund to Malta also gets you around the €2 million standard fund threshold, while ARFs aren’t bound by the same drawdown rules. But it’s important to go about it the right way. Shannon would urge anyone who is considering such a move to ensure that everything is done with the full knowledge of the Revenue.

“There is no way you can do it, or should do it, without giving the information to the Revenue first,” he says.

Plan ahead

Moving yourself, or your pension – or both – abroad is not a step that should be undertaken lightly. “You need to plan for this, you’d almost need two to three years’ planning for this,” says Murray.

And, he adds, if you’re going to move your pension fund, timing is key. “You need to do it at the right time, before it goes into an ARF, because you can’t move an ARF or a vested PRSA,” he adds.

As Shannon notes, the regime can be “incredibly beneficial if you plan it properly. But if you don’t plan it you can go from incredibly low tax rates to punishing tax rates,” he says.

There is also the issue of knowing how long the regime might last. “You don’t [know], and that’s a risk,” Murray says.

And you’ll have to be prepared to stay out of Ireland for at least half of the year, or risk falling back into the Irish tax net. And then there is always the risk that it won’t work out at a personal level but, financially, it may not make sense to return home.

What about other taxes?

If you are in receipt of a defined benefit pension, and thus fulfil the requirements for the NHR regime, you might be thinking of a move. But remember to sort out your Irish tax affairs first. As Murray stresses, it’s important to remember that if you’ve always been tax resident in Ireland, then, for the three years after you leave, you will still be ordinarily tax resident.

“So Ireland can still try and tax you on worldwide income,” he says.

This means that there can be a bit of work in working out an individual’s tax position, and will need consideration of double taxation treaties between Ireland and Portugal.

What people also need to bear in mind is that certain taxes must always be paid in Ireland

If you get a PAYE exclusion order, however, this three-year rule won’t apply, and you will be immediately released from the Irish tax net.

What people also need to bear in mind is that certain taxes must always be paid in Ireland – regardless of where you live. For example, if you move abroad and keep a rental property in Ireland – including renting your family home – then tax on this rental income will be subject to Irish taxes.

And if you should sell this property, you’ll pay capital gains tax (CGT) at the Irish rate of 33 per cent on this or, in the case of a family home, some of the sale proceeds.

Similarly, assets in Ireland will typically be subject to Irish inheritance laws. So, for example, should a couple move to Portugal, and subsequently die, leaving their home in Portugal to their children who still live in Ireland, these children will be subject to Irish inheritance taxes.

“To get out of Irish inheritance tax both the person [giving] and the person receiving the inheritance have to be not ordinarily resident in Ireland,” says Murray.

The costs

Given the various requirements, professional advice will be necessary for anyone considering such a move, and this will cost. Deloitte’s Portuguese operation, for example, offers a one-stop shop for those interested in moving there, and typical fees include moving your residence to Portugal (€500) applying for NHR status (€1,000); and filing of personal income tax returns (€1,900).

You may also need Irish tax advice, however, to determine your residency and tax liabilities here.