A taxing retirement

I was talking to a friend this week who has been living in Spain for a number of years now and was asking me about the best way for him to access benefits from a pension he has siting with an insurance company in the UK.

He wants to take some money out of it to help him over the next few months because he has stopped work and has no income, although he does intend to start working again soon, and in fact may come back over to the UK to live and work.

The problem this creates for him is that he has no idea how the money that he takes out of his pension will be taxed when he takes it. The insurance company might be instructed by HMRC to deduct some tax which, if he wasn’t due to pay it because of his personal circumstances, he may be able to claim back in a year or so. But he might also be due to pay tax on the income he has taken from his pension in Spain, under Spanish tax laws!

On top of that, once he has taken more than the tax-free lump sum out of his pension he is then restricted on the amount he can pay in if he starts working again in the UK, because his annual allowance could drop to £4000.

The Spanish issue is, I suppose, just one of these things that happens when you have a pension in one country land live in another, although the tax issue can apply to UK residents as well if they are not careful when taking money out of their pensions. The other issue of paying money back in when you have already started to draw your pension is a classic example of the Government making changes to pension legislation when they don’t really understand the consequences of these changes for a workforce that is more flexible now than it has even been before.

Governments need to be more careful and think through the consequences of the changes they make to pension legislation before making them.

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