Retirement Planning for British Expats in Spain

The dream of retiring to Spain from the UK is one that has attracted many expats, enticed by the country’s balmy weather, relaxed culture, vibrant cuisine and friendly people.

Whether you’re contemplating a move to the country or are already established there, it’s essential to first ensure your retirement plans are grounded in solid financial security.

When it comes to managing your pension income, wealth and other financial assets, there are important differences between the UK and Spain, and restructuring your finances to maximise your tax efficiency is the best way to guarantee a comfortable retirement for British expats in Spain.

Transferring your pension

It’s likely that when retiring to Spain from the UK, a major source of income will be your pension, and one of the biggest challenges of a move abroad is an unfamiliar tax environment and how this will affect your pension assets

If you’re planning a move to the country or for Brits already living in Spain, you may want to consider transferring your UK pension into a QROPS – a qualifying recognised overseas pension scheme that is recognised by HMRC.

Is a QROPS a viable investment option?

For British expats in Spain, establishing a QROPS ensures your pension assets can grow in a tax-free environment. This does so by avoiding the considerable financial charges incurred by exceeding the UK government’s lifetime allowance on pension savings (a limit on how much you can build up in pension benefits before triggering penalty taxes from HMRC). This could be of particular benefit to those whose pension funds are nearing the current £1,073,100 cap of the lifetime allowance (frozen until April 2026).

Transferrals from a UK pension to a QROPS will be subject to a lifetime allowance test by the transferring UK pension scheme. If you do have a large pension fund, transferring to a QROPS before it exceeds the lifetime allowance will ensure your savings can grow undisturbed going forward, as QROPS are not subject to penalty charges. Furthermore, your pension fund will not be affected by any future changes in UK legislation.

For British retirees in Spain, the benefits of a QROPS also extends to your heirs. According to UK rules, if you die after the age of 75 any beneficiaries of your UK pension will pay tax at their marginal rate of income tax when accessing the remainder of your fund. However, if you move your assets to a QROPS then a lump sum death benefit can be paid tax free even if you are over 75, as long as your beneficiaries are resident outside of Spain and you have been non-UK resident for at least 5 years prior. If your beneficiaries reside in Spain then any taxation is dependent on the region that you live in. For those living in Andalucía, there would be no tax if your total assets are under €1,000,000 and only 1% tax to be applied to the excess over this figure.

For UK expats who do have a QROPS in Spain (or QNUPS – A Qualifying Non-UK Pension Scheme) there are additional tax benefits that come in the form of using a short-term temporary annuity to pay your pension income (which specifies a fixed sum of income for three, five or 10 years). Doing so ensures only a proportion of the income is subject to taxation under Spanish law.

Other options for retirement planning in Spain

For Brits moving to Spain, when it comes to limiting tax on pension drawdowns, as well as inheritance tax planning, another option for managing your pension assets is a QNUPS (Qualifying Non-UK Pension Scheme). This pension scheme offers some highly effective tax planning benefits, especially if you have investable wealth outside of an existing pension arrangement. For those looking to make additional retirement planning provisions, a QNUPS allows you to shield said pension assets from both UK inheritance tax and local succession taxes.

Dependant on age, it may also be possible to structure pension income drawdowns as a short-term annuity to cap the effective tax rate to around 3%. The pension would also not be affected by lifetime allowance rules. Finally, if you were to return to the UK then any pension assets held in a QNUPS would typically remain outside of the UK inheritance tax net. It’s also worth noting that EU-based pensions are not included in calculations for Spanish wealth tax, and this applies to a QNUPS and QROPS.

Spanish compliant bonds

Another option for British expats living in Spain when it comes to financial planning is the Spanish Collective Investment Bond (SCIB). This is a lump sum investment written as a life assurance contract and widely viewed as the closest alternative to a UK ISA. Investments held within a SCIB can grow free of any tax until withdrawals are made and are not reportable on your Modelo 720. Once withdrawals are taken, the tax applied is based on the gain element of the investments only making these extremely tax efficient.

International SIPP

A further choice to consider for retired expats in Spain is an International SIPP (Self Invested Personal Pension), a UK-based, FCA regulated personal pension scheme designed for non-UK residents that offers greater flexibility to access your funds. An International SIPP does not offer the same tax benefits for Spanish residents as a QROPS though. Income received would be taxed at your income tax rates dependant on the Spanish region that you live in. As an International SIPP is a UK based scheme, this means that you may have to pay a tax charge should you exceed the UK lifetime allowance and your beneficiaries will pay tax should you die after the age of 75.

Inheritance tax and UK domicile

Sensible financial planning in retirement, will, of course, extend to safeguarding your estate for your heirs. Spain enjoys favourable inheritance tax rules compared to the UK. For example, those looking to retire in Andalusia will be interested to learn that no succession tax is applicable on the first 1,000,000 euros of assets. Anything exceeding this threshold is subject to a tax of just 1%.

However, if you’re planning an expat retirement in Spain then it’s important to be aware that benefitting from these favourable conditions is contingent on successfully navigating the complex issue of UK domicile.

If you are born in the UK and spend most of your life there (as well as your parents), then your ‘domicile of origin’ is likely to be the UK, and your estate will be subject to UK inheritance tax.

If you claim to be non-UK domiciled for inheritance tax purposes, HMRC will examine in detail your personal and family life, background, business interests, property ownership, lifestyle and intentions in order to determine your domicile. As there no fixed rules and requirements, acquiring a new domicile can be challenging so it’s essential you plan ahead and seek expert advice to make the best decisions.

Retirement in Spain: an exciting opportunity

Any move abroad should be accompanied by sound financial planning, and key to this is expert, unbiased advice from a trusted and reliable wealth management advisor. Doing so when establishing your new life in Spain will mean you can make the most of the exciting opportunities available, as well as ensuring a stable future.