Thinking about transferring your pension overseas? Malta might be the perfect place for you! With its favorable tax laws, Malta is becoming an increasingly popular destination for Irish pension transfers abroad. In this article, we will explore the benefits of transferring your pension to Malta, and whether or not it is a suitable option for you.
IORPs Cross Border Pensions
The aim of the IORP II Directive (Institutions for Occupational Retirement Provision Directive) is to ensure the sustainability and security of occupational pension schemes and to promote their development across the EU. The IORPs scheme, therefore, makes it possible for Irish members of Occupational Pension Schemes to benefit from the principles of free movement of capital (abroad) and free provision of services, while ensuring pension scheme members and beneficiaries are better protected through rigorous EU prudential standards.
The IORP’s scheme allows for maximum flexibility particularly for many Irish residents who have built up pension benefits working in the UK and who want to transfer or consolidate them abroad (in this case, Malta). This is because the scheme meets HMRC’s QROPS (Qualified Recognized Overseas Pension Scheme) conditions and can accept transfer from any UK regulated pension structure and will follow QROPS rules on drawdown, making it an ideal mechanism for the management of your retirement benefits.
Who should consider moving their pension to Malta?
1. Irish & EU nationals residing / working in Ireland.
2. Irish & EU nationals with existing Irish pensions, particularly occupational pensions.
3. Irish nationals with existing Irish pensions who are highly mobile with their employment.
4. Irish nationals considering retiring to another EU country.
5. British nationals residing / working in UK, with the intention of retiring out of UK.
6. British & EU nationals with existing UK accumulated pensions.
7. Any EU national with an occupational pension.
Why Transfer my Pension to Malta?
Malta is a respected, English speaking financial center with a robust overseas pension scheme legislation. It also brings the security of Malta being a full member of the European Union.
Benefits of Malta Pensions
1. Tax Efficient:
Malta has over 70 double taxation agreement (DTT), for residents of countries that have a DTT with Malta (avoiding potential double taxation).
Traditionally in Ireland, most people make use of the Approved Retirement Fund (ARF) as a retirement vehicle used to receive pension income (after taking the tax-free lump sum). Here, Irish taxes will be applied on any withdrawals made from the ARF as it is deemed Irish Sourced income. This leads to double taxation as you may also be liable to tax in your country of residence.
There is no overseas transfer charge when transferring from UK accumulated Pensions (usually 25%), or for members who do not live in the same country or member state (in the EU). I.e., when transferring to a Maltese Occupational Pension Schemes you are exempt from this charge.
With a Malta pension, you can have access to a Lump Sum of up to 30% (uncapped). This is a significant advantage for large pensions. A pension pot of €2 million would receive a tax-free lump sum of €600k in Malta.
In Ireland, the tax-free lump sum that can be taken at retirement is 25% and is capped at €200k. Any amounts over €200k will be taxed as follows:
Between €200k and €500k = taxed at 20%.
The balance exceeding €500k = taxed at 40% (and is also chargeable to USC).
Whats also a significant advantage is that there is no Lifetime Allowance Charge once a pension is transferred to a Maltese pension scheme.
In Ireland, there is a €2 million pension fund cap with amounts in excess of this being taxed at 40%. There is no such cap in Malta. (Refer to ‘Case Study 3’ below).
2. Flexible options:
You have the option to retire at age 50 and take flexible benefit drawdowns (Refer to ‘Pension Income’ below).
You may combine various smaller pensions into one large pot and so benefit from cheaper fees.
3. Investment choice:
You can have access to a wide range of investment opportunities (regulated and unregulated). When the pension is transferred, the proceeds will need to be invested. With some pensions abroad, investment choices can be limited, especially with UK pensions, and they do not have the range of funds that are available in a Malta pension scheme.
Please note, you cannot contribute to a Malta Pension.
4. Currency flexibility:
Malta allows for currency diversification. This can be beneficial if you want to avoid currency exchange and maintain exposure to multiple currencies and diversify your investments (if you have built up pots in various currencies).
5. Maintain residency:
There is no obligation for you to move abroad (leave Ireland) if you are thinking of transferring your benefits to Malta. There are currently many individuals with Malta schemes living in other parts of the world as well as Ireland.
6. Estate Planning:
An increasing reason why people are considering moving assets to Malta is due to estate planning opportunities and asset protection, which can be particularly important for those with high net worth or complex financial situations (refer to the below for benefits on death).
How do I receive my Pension Income?
You will need to be at least 50 years of age before you can access an income from the pension. You can also defer the income until age 75.
Pension Lump Sum:
The pension lump sum will be paid to you as a percentage that is calculated on the total pension value, of which the maximum is up to 30%. This can be paid as soon as the pension is transferred to the Malta scheme, or at a later stage.
Once the lump sum is paid, you can decide on whether you would like a regular income, or even a one off payment.
In Ireland, as per Minimum Distribution, you are required to draw down 4% – 6% of the ARF annually (depending on your age) even if you don’t need the income. This creates unnecessary payments of income tax.
If the pension is transferred to Malta, you can draw down funds as required.
If you wish to receive an annuity income, the income paid to you is measured by an actuarial calculation that is based on pension value, years to retirement, and your age.
It is important to note that it only makes sense from a tax perspective to transfer Occupational Pensions to Malta.
PRSA’s and ARF’s
It is not recommended to transfer Personal Retirement Savings Accounts (PRSA) or Approved Retirement Fund (ARF) Approved Retirement Funds (ARF) to Malta as you will not be able to reclaim Irish Tax under the Double Tax Treaty (DTA) and you will therefore be taxed twice.
What happens on Death?
The benefits are held in trust and payments can be made directly from the pension scheme to the individuals who want to receive benefits without having to go through an estate.
• No need to wait for granted probate.
• Not subject for forced heir-ship rules that apply in many jurisdictions.
On your death, there are no restrictions on who you can nominate who your benefits can go to. Whether you are going through a divorce or have additional family members you need to take care of, etc, the benefits can be passed on by way of a beneficiary nomination form.
If you pass away during the lifetime of the scheme, your nominated beneficiaries will be provided with two options:
Lump sum paid out:
This can be done by either encashing the investment, or if the asset structure allows it, it can be transferred in specie in their own name.
Alternatively, they could also use the proceeds from the pension and set up a new pension in their own name.
In Malta, if you pass away, your spouse will received the full value of the pension tax-free.
The following case studies show how each individual can benefit by moving their pension to Malta.
Case Study 1: Irish Resident
• John has a current pension with Standard Life with a mixture of Standard Life Funds Valued at €500,000.
• John is nearing retirement.
• He has a property in Spain and is looking to permanently move to Spain.
Due to Irish tax law, if John had to first retire his pension to an Approved Retirement Fund (ARF) in Ireland and then transfer the ARF over to Malta, he will be taxed twice. He will pay Irish tax at source (PAYE on income coming from his ARF) and then subject to further income tax in Spain. John will not be able to reclaim Irish Tax under the Double Tax Agreement (DTA) as the Irish state has deemed that the ARF is “not a Pension”.
Therefore, John should first move his pension to Malta as part of an Occupational Pension Scheme to avoid being taxed twice. He will thereafter benefit from:
• Improved flexibility when pension is retired.
• Tax free fund growth.
• Avoid being potentially taxed twice on Income drawdown.
NB// There is no obligation for you to move abroad (leave Ireland) if you are thinking of transferring your benefits to Malta. There are currently many individuals with Malta schemes living in other parts of the world as well as Ireland.
Case Study 2: Non Resident
• Jennifer is resident in Northern Ireland (outside the Irish tax jurisdiction) and has a maturing Irish pension benefit worth €300,000.
• She wants to continue living in Northern Ireland in the future.
If Jennifer doesn’t put any thought into the retirement process into whether or not it is appropriate, and she retires her pension as an ARF in Ireland she will suffer PAYE at source and will need to file a tax return and pay tax in the UK. As a result, she will not be able to reclaim Irish Tax under DTA as ARF is “not a pension.”
Instead, in this case, Jennifer solved the problem by transferring the pension to Malta.
• The income will be paid gross in Malta on a regular basis directly to Jennifer’s bank account. No tax will be deducted in Malta.
• Jennifer can then file and pay tax in the UK in respect of that income.
Case Study 3: €2 million Limit
This case refers to individuals who have significant benefits. At a €2 million level, you have a situation where an exposure to excess fund tax applies.
Richard is 40, owns his own business in Ireland and has a fund worth €2 million.
Richard wants to retire with €3 million in his pension fund and at that time he decides to accesses his benefit, he will trigger whats known as a ‘Benefit Crystallization Event’ (BCE) and be taxed at 40% on the excess of the fund over €2 million. Therefore, he will be taxed at 40% on €1 million (excess), handing over €400k to the Irish state.
If Richard waits to 60 his fund could exceed €5 million making him liable to Excess Fund Tax (EFT) of €1.2 million.
He will need significant planning to avoid that!
Richard consults a Financial Advisor and is advised to transfer his pension of €2 million to Malta to avoid paying EFT.
• The transfer will trigger a Benefit Crystallization Event (BCE) so the Excess Fund Tax (EFT) is immediately assessed on the value that then exists which is €2 million. As the amount does not exceed €2 million, there is no 40% tax payable.
• The pension is now in Malta and continues to grow to €5 million tax free as there is no tax on income, or tax on capital gains in Malta.
• Richard can now achieve his objective of reaching €5 million at age 60.
• It is also possible for him to receive a lump sum of 30% of the fund when he reaches retirement (up to €1.5 million at age 60).
• He will also have flexibility on his draw downs to suit his lifestyle thereafter.
This is therefore a much better outcome for Richard than if he remained in the Irish system.
Irish Transfer Process
There is no need for prior Irish Revenue approval when transferring from an occupational scheme if:
• Transferring to an IORPS approved scheme established in a Member State that has implemented the IORPS Directive and with a scheme administrator resident in an EU State.
• The receiving pension arrangement has been approved by an appropriate regulatory authority for the country concerned.
• The arrangement provides relevant retirement benefits.
• Transfer is for Bona Fide reasons (Declaration by Member) provided to Irish Revenue within 7 days of signature/departure to Malta by transferring pension provider.
Transferring to a Non IORPs:
An application must be made to Irish Revenue prior to making the transfer. Once approved, the transfer will then be made over to a personal scheme in Malta.
If there is a Benefit Crystallization event, a Benefit Noncrystalline Certificate must be completed.
There are several attractive reasons for transferring pensions to Malta, but it’s important to note that whether or not this is a good idea depends on individual circumstances and should be carefully considered with the help of a financial advisor.
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