Working in several countries is now common and retiring in a different one again is increasingly so. The tax treatment of the resulting pension income is one of the least understood parts of cross-border finance, partly because it is genuinely fragmented.
The starting point is that pensions are dealt with by their own article in most double taxation treaties, separate from the employment income article, and that article distinguishes between categories of pension.
The three categories
- Private and occupational pensions. Under the standard treaty model, taxable only in the country of residence of the recipient. This is the general rule and it covers most workplace and personal pensions.
- Government service pensions. Taxable in the country that paid for the service, not the country of residence, unless the recipient is a national and resident of the other state. Civil servants, military personnel and many teachers and health workers fall here.
- State social security pensions. Treated inconsistently. Some treaties assign them to the source country, some to the residence country. There is no general rule and the specific treaty must be read.
That last point is the one that catches people. A British state pension, a German gesetzliche Rente and an American social security benefit are each handled differently depending on which treaty applies, and assuming the residence rule covers everything is a common error.
Some countries tax on the way out regardless
Lump sums are the difficult case
Taking a pension as a lump sum rather than an income stream frequently falls outside the pension article entirely, or is treated differently by each country. A payment that is partly tax free in one country may be fully taxable in another.
The British twenty five percent tax free lump sum is the clearest example. It is tax free in the United Kingdom and is not necessarily tax free anywhere else. A UK pension holder resident in France, Spain or Ireland taking that lump sum may find it taxed in full by the country of residence, which converts a well known benefit into an expensive mistake.
Where a lump sum is planned, the sequence matters: taking it while still resident in the country that grants the exemption, and then moving, produces a different result from moving first.
Transferring the pension itself
Moving a pension pot across borders is possible in some corridors and not in others. Within the United Kingdom there is a specific regime for overseas transfers with its own charge. Within the European Union, transfers between occupational schemes are limited and the more common approach is to leave each pension where it is and draw from several.
Leaving pensions in place is usually the simpler answer, at the cost of administering several small pensions in several currencies. That currency exposure is itself significant and is covered in getting paid in a foreign currency.
Before you move
- Read the actual treaty article on pensions between the two countries. They differ, and secondary summaries are frequently wrong about state pensions.
- Identify which of your pensions are government service pensions. That category surprises people and it cannot be planned away.
- Decide on lump sums before changing residence, not after.
- Check whether the departure country applies an exit charge or retains taxing rights over reliefs previously granted.
- Check healthcare entitlement separately. It follows different rules again, and for many retirees it matters more than the tax.
Related: The 183 day rule