Pensions in Cyprus

Cyprus and pensions

Cyprus offers advantageous tax treatment for residents who receive UK source pension income. You can opt for the pension income to be taxed at the scale rates of tax, so if this is less than €22,000 per annum, no tax is due on the income.

Alternatively, you can opt for your pension income to be taxed at a fixed rate of just 5%, with the first €3,420 tax free. Up until 31st December 2018, this applied to all pension income, regardless of whether the pension was paid by the UK government, a company pension or a private pension.

But the UK and Cyprus negotiated a new Double Tax Treaty which came into force on 1st January 2019, which gives the UK exclusive taxing rights on UK government service pensions.

Defence contributions

Defence contributions are just another tax and it is applied to the worldwide investment income of individuals who are resident and domiciled in Cyprus, at the following rates:

• Interest 30% (reduced to 3% if your income is less than €12,000)
• Dividends 5%
• Rental income 3% (on 75% of gross income)

Non-Cyprus domiciles are exempt from defence contributions. Generally, you will be considered Cyprus-domiciled if you were born in Cyprus or you have been resident for 17 out of the last 20 years. Most UK expatriates therefore should escape tax on interest and dividends for their first 17 years of residence.

Pensions

If moving to Cyprus is also part of your retirement plan, then understanding how Cyprus will tax you is crucial in establishing how good a standard of living you can expect. Pensions are often the key to long-term financial security, so it is crucial you understand the added complication of factoring in the tax rules of two countries. So, what are today’s options? 

Defined Contribution (DC) or money purchase pensions

This category includes most personal and employer pensions and Self-Invested Personal Pensions (SIPPs). Here, what you are entitled to depends on how much you have paid into the scheme alongside employer contributions, tax rebates and investment growth.

Expatriates have the option to transfer UK pension funds to an EU-based Qualifying Recognised Overseas Pension Scheme (QROPS). QROPS advantages include the flexibility to pass pension benefits to chosen heirs, take income in euros or sterling and greater investment choice. Once in a QROPS, funds are protected from future UK taxation, including lifetime allowance penalties.

Defined Benefit (DB) or final salary pensions

Here, your employer guarantees a proportion of your salary for the whole of retirement. While you cannot usually withdraw cash from this type of pension, you can transfer it to a DC, SIPP or QROPS. Traditionally, this has been considered less beneficial than drawing a guaranteed pension for life.

Some ‘transfer values’ have hit highs due to the calculation companies are required to use, as well as some wanting to reduce their future pension liabilities. That said, you will be giving up an income for life, with no guarantees the performance of the pension fund will deliver a retirement income that matches or exceeds the original DB annual payment.

Pension taxation

Most UK pension schemes allow a 25% lump sum withdrawal from the scheme minimum retirement age (often 55 years of age). If you take this whilst you are UK tax resident, then it will be tax-free. If you were to take more than 25%, then the excess would be taxable according to the UK normal income tax scale rates applying in the year of withdrawal.

If your intention is to take a lump sum, normally the recommendation would be to take this before giving up your UK tax residence, but Cyprus does not tax pension lump sums, so you could receive this before or after you move.

If you have moved to Cyprus, then the UK/Cyprus Double Tax Treaty treats regular pension income as taxable in Cyprus. The one exception to this is in respect of UK government service pensions which remain taxable in the UK.

Regular UK pension income is taxable in Cyprus at either:

• a flat rate of 5% (with a €3,420 zero tax allowance), or
• the scale income tax rates ranging from 20% up to 35% (with a €19,500 zero tax allowance).

UK pension schemes benefit from the 2015 ‘Pension Freedoms’, which allow you to take benefits in a variety of ways including in the form of drawdowns (including 100% of the pension pot, or that remaining after the 25% tax-free lump sum).

If you were to take this route after you have left the UK, then a provision in the Double Tax Treaty states these will be taxable in the UK, as Cyprus does not tax pension lump sums. A lump sum from a QROPS may avoid the UK tax charge under the Double Tax Treaty. A benefit of a QROPS is that a drawdown of the pension fund may avoid the UK tax charge under the Double Tax Treaty.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.