The Finance Bill 2022 will introduce definitive legislation to cover the taxation of retirement lump sums from foreign pensions for the first time. The change means that a lump sum taken by an Irish resident from a foreign pension arrangement will now be treated in the same way as a domestic pension, counting against their normal pension lump sum limits where the first €200,000 is tax free and the next €300,000 is taxed at 20%.
On the face of it this change to the legislation seems to make sense, why would a pension held outside the state be treated more favourably than a pension held inside the state? There are however many areas where a crude rewriting of the tax rules can cause issues. The first one that jumps to mind is a pension that is taking a retirement lump sum that has rules similar to Ireland. In this scenario a client in the fortunate position to be taking a lump sum of €500,000 will pay tax of €60,000 in the country in which the pension pot resides, they will then receive €440,000 in Ireland and pay a further €60,000 as they are re-taxed on the entire retirement lump sum. Of course, this scenario could be mitigated by a favourable tax treaty, indeed countries like Malta who specialise in pension provision will pay out retirement lump sums gross of tax, DTA dependent.
Of more immediate concern is the potential difference between drawing down a retirement lump sum on 31st December 2022 and 1st January 2023. Given the Finance Bill 2022 is taking action to ensure foreign retirement lump sums are taxable in future, this seems to confirm the long-held opinion that they are not presently. The upside of this is that anyone who has both domestic and international pension pots that are likely to pay a combined retirement lump sum in excess of €200,000 should consider drawing down their foreign pension before New Years Eve, if possible.
Unfortunately, the decision to draw down a foreign pension immediately or not, is not a simple one. There can be many other pension and taxation rules at play that need to be considered, for example, the majority of foreign pension pots held by Irish residents are in Britain. It is important to note that once a retirement lump sum has been taken from a British pension pot, that pot cannot be transferred back to Ireland. Given the political uncertainty that currently looms across the water pension holders may be reticent to move in haste for a short-term gain. That being said these pension investors would have the option to move their pension arrangement, post lump sum, to Malta or another E.U. member state that has a similar pension regime to give them some comfort.
Some other important factors to consider before retiring a pension scheme abroad are:
- the commencement of a mandatory drawdown and the associated taxation consequences,
- what happens to the pension fund on death?
- do you have the same access to take lump sums out of the post retirement fund?
- is the double taxation treaty favourable in relation to the double taxation on post retirement income?
While there is opportunity here for a large number of pension investors, the decision-making process is complex. I am in no doubt that good impartial financial advice and probably taxation advice is required prior to making any decision. Time is also of the essence as retiring a pension pot in any country can be a laborious process.
Author: Eoin Hassett, Independent Trustee Company. For further information, please talk to your Financial Advisor or email firstname.lastname@example.org