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retirement in spain

Posted: Thu Feb 6, 2020 12:27am
35 replies1837 views11 members subscribed
richard22

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 I am after more information on the new income needed to retire in Spain after next year.I am in the lucky position where i have a large private pension plus a large investment isa so am able to retire early but not for a few years, i am seen on the forum that post bexit i will need a income of around 25000 euros plus around 6000 euros for my wife to live in Spain full time 

.What i am trying out is the tax position of this  income needed to find out if i would be better off  doing 6 months in uk / spain as the last thing i want is getting hammered with tax as we would not need  31000 euros to retire in Spain normally and my pre bexit plan was on a smaller income amount needed to live full time in Spain plus top up if needed from my tax free uk isa

Movingon

Posted: Thu Feb 6, 2020 3:48am

Movingon

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Posted: Thu Feb 6, 2020 3:48am

Nobody really knows how it will work in practice yet but I'd be surprised if after demonstrating sufficient income for residency it was something you had to continue to show on an ongoing annual basis. 

If so then once you'd gained residence subsequently you could draw down from your pensions only what you needed or had planned for.

jimtaylor

Posted: Thu Feb 6, 2020 4:46am

jimtaylor

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Posted: Thu Feb 6, 2020 4:46am

I'm waiting for the Brexit dust to settle before I determine the residencia requirements, but I'd point out that the initial residencia TIE is only for one year, and you have to do two subsequent renewals before you get permanent residencia at the five year point, so you might need to prove you meet the financial requirements three times in all.

The advantage of residencia is that after the first year it might be cheaper to buy into state healthcare than continue buying private health insurance. In addition there effectively won't be any restrictions on your movements.

The disadvantage of residencia is that if you have a large personal pension (not an annuity) then you're likely to pay considerably more tax in Spain than in the UK.

The disadvantage of remaining non-resident is that your visits would be limited to 90 days in any 180.

jimtaylor

Posted: Thu Feb 6, 2020 8:46am

jimtaylor

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Posted: Thu Feb 6, 2020 8:46am

I don't really think I can explain clearly!

It's partly because there's an 'earnings related allowance', as well as the personal allowance and the €2K allowance just for having pension etc income.

If earnings related income is less than €13115, the allowance is €5565.

If earnings related income is between €13115 and €16825, the allowance is: €5565 less 1.5 x (earnings related income - €13115).

Over €16825 you don't get anything.

So if your income is over €16825 then you lose out on the allowance which is available to ordinary mortals. If you're between €13115 and €16825 you get a reduced allowance. The result is that the more you have within the two figures, the less your allowance is, so the more tax you pay - it's like taking money away with both hands.

Then there are the number of tax rates, which are messy because the state and Valencia have different tax bands. To give an example, if your taxable income is less than €12450, the tax rate is 19.5%. If the taxable income is €50000, the tax rate is 36.5%.

And then it's further complicated by the fact that your personal allowance only gets relief at the 19.5% basic rate of tax.

I hope that's clearer than mud, but accept that it's decidedly murky!

Lancelot

Posted: Thu Feb 6, 2020 10:59am

Lancelot

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Posted: Thu Feb 6, 2020 10:59am

We haven't yet had our formal tax review/ profiling with a tax expert which we plan to do however for some odd reason the Spanish tax advisor seems to have a normal process where once we have bought in Spain they suggest discussing tax matters. I think this is probably based on logic from their part which is well you are moving to Spain and given tax is paid a year in arrears you will have time to sort it out. Clearly for many whether they should move to Spain will partly be based on the future tax profiling.

That said, counter intuitively, there seems to be a good case for holding more cash outside of UK tax wrappers before retiring to Spain and becoming fiscally resident. Going forward taking smaller top up payments from personal pension wrappers such as SIPP's based on current Spanish tax rates and financing spend from cash. This in theory keeps the Spanish tax bill very low or near zero - though there will be a tax payable of global wealth which includes cash holdings (subject to personal allowances of EUR 700K for investments and EUR 300k for your main residence IIRC.

The 25% tax free amount from your UK pension would be taxed if you were tax resident in Spain before drawing it - so for some if they really need it wait until you have drawn it before becoming fiscally resident in Spain.

Ultimately if you are resident and you do stay longer term then either you have to bite the bullet and pay up for larger withdrawals from UK held pots. My own profiling suggests that if my wife and I both use our tax Spanish tax allowances and take around EUR 38k a year we will pay around EUR 6k tax - when in future the indexed figure solely comes from my pot it raises to around EUR 9 or 10k per year, all of this would need to be critiqued by an tax expert in the near future.

I think there are some nuances of the Spanish tax system where it might be preferable to take income from dividend paying holdings within UK tax wrappers and pay CGT on it in Spain rather than income tax but again I'm only going to able to explore this further once I meet with an expert.

Two things are quite clear and that is that Spain is not a place to retire to if you want a lower income tax bill and you must pay for professional profiling, though the latter would be appropriate wherever you planned to put your feet up.

You can have a play around with this tax calculator by opening up the advanced tab - don't ask me how it works though it took me a while to make sense of it :) 

https://www.icalculator.info/spain.html 

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jimtaylor

Posted: Thu Feb 6, 2020 2:08pm

jimtaylor

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Posted: Thu Feb 6, 2020 2:08pm

You make some good observations, and for anyone with a healthy amount of income I agree with you. Just a couple of observations:

On a quick look at the calculator you link to, I can't see where you enter your age - which affects the amount of personal allowance. And on a quick play, I don't agree with the bottom line amount of tax due.

In some cases, where the individual has made their own payments into a pension pot, then look at the cost/benefit of converting that pot into an annuity. The monthly payment on an annuity may be less than from a straight pension, but only a portion of an annuity is taxable, so the net income after tax may be better. For example, if you start receiving an annuity after your 65th birthday, then 76% of it is tax free.

Lancelot

Posted: Thu Feb 6, 2020 3:37pm

Lancelot

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Posted: Thu Feb 6, 2020 3:37pm

jimtaylor wrote on Thu Feb 6, 2020 2:08pm:

You make some good observations, and for anyone with a healthy amount of income I agree with you. Just a couple of observations:

On a quick look at the calculator you link to, I can't see where you enter your age - which affects the amount of personal allowance. And on a quick play, I don't agree with the bottom line amount of tax due....

...

In some cases, where the individual has made their own payments into a pension pot, then look at the cost/benefit of converting that pot into an annuity. The monthly payment on an annuity may be less than from a straight pension, but only a portion of an annuity is taxable, so the net income after tax may be better. For example, if you start receiving an annuity after your 65th birthday, then 76% of it is tax free.

The tax advantages for an annuity sound interesting though rates are pretty dire. Personally I chose the SIPP because it can be passed on to my next of kin in the event of my death tax free if before 74 and haven't spent it all. I am not a frequent visitor to the gym and have spent much of my life behind a desk :)  I suppose it's all a trade off and worthy of consideration, so thanks.

With regard to the calculator I have used it more of a high level estimator, I think the data I took from it is as a result inaccurate but close enough to the truth in our case. Subject to sanity check when I have the formal tax meetings.

jimtaylor

Posted: Thu Feb 6, 2020 4:07pm

jimtaylor

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Posted: Thu Feb 6, 2020 4:07pm

I may be wrong, as it's not a subject I've researched, but Spain don't recognise such a (strange to them) concept as 'tax free'. As well as declaring income you take from a SIPP as taxable income, your inheritors would be taxed on any amount they inherit.


Lancelot

Posted: Thu Feb 6, 2020 4:19pm

Lancelot

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Posted: Thu Feb 6, 2020 4:19pm

jimtaylor wrote on Thu Feb 6, 2020 4:07pm:

I may be wrong, as it's not a subject I've researched, but Spain don't recognise such a (strange to them) concept as 'tax free'. As well as declaring income you take from a SIPP as taxable income, your inheritors would be taxed on any amount they inherit.


Something else for me to check - thanks. 

Dodster

Posted: Fri Feb 7, 2020 9:47am

Dodster

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Posted: Fri Feb 7, 2020 9:47am

Good discussion. For those wrestling with the pros and cons of moving to Spain permanently or maintaining a 90/180 (or less) relationship, the absolute headline is that non-taxable UK income allowances (25% pension, CGT allowances,ISAs etc) do not transfer to Spain if you're fiscally resident.I say this because the original poster seemed to suggest that they had planned to top up income from UK tax free ISA when living full time in Spain but Brexit or no Brexit the ISA income would be taxable in Spain.This might be a common misconception.

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