Portugal Expat Pensions

The Portugese pension system has the following elements:

• Pillar 1: (Dominating) State Pensions;
• Pillar 2: (Modest) Voluntary Occupational Pensions;
• Pillar 3: Personal Pension Savings.

I. Structure

The Portuguese State Pension is one of the most generous (and expensive) in the world. The OECD concluded that the country’s pension contribution is among the highest of its 35 member countries.

The pension has two very different categories:

• An earnings and contribution based Basic Pension.
  Which includes everyone in Portugal who made enough social security contributions for at least 15 years. This includes the self employed and also persons with a non Portugese nationality.
• A means tested Social Minimum Pension.
  Which is meant for those who have not worked/paid enough contribution in the past.
• The pension amount is linked to longevity and indexed at Consumer Price Index level with a maximum real increase of 0.5% per year.

The pension accrues at 2% of the earnings base for each year of contributions for 20 or fewer years of contributions. Those who have more than 21 years of contributions, have an accrual rate ranging between 2% and 2.3%, depending on their income. Pension benefits accrue for a maximum of 40 years.

II. Premium

The annual contributions amount to:

• For Employees: 11% of their gross income;
• For Employers : 23.75% of the payroll;
• For the Self Employed: 25,4% of their income within a minimum/maximum range.

III. Retirement Age

The standard retirement age is age 66 and 5 months. It will steadily increase to age 67 as of 2029. A minimum of 15 years of contributions is required for retirement at age 66 and 5 months.

Early retirement is possible as of age 55 if one has 30 contributing years. Then the pension is reduced for every year it is drawn sooner. For every year retirement is postponed after age 66 and 5 months, the pension amount will be increased.

As of age 70 the pension starts to pay-out at any rate.

I. Structure

Occupational plans are voluntary. Therefore only 1% of all Portuguese companies have a pension plan. At the end of 2020 only 4% of the working population was covered.

In order to benefit from tax relief, companies have to use a plan that covers all employees hired with a permanent contract after serving a probationary period of six months. A minimum age requirement of age 21 is sometimes included.

For pension plans that comply with requirements regarding coverage, benefit calculation, retirement age of 66 and 5 months, investment policy and information provisions, employer contributions are taks deductible up to a limit of 15% of an employee’s salary (or 25% if the employee is not covered by the social security plan).

Employees may deduct from their taxable income 25% of their contributions to an occupational pension scheme up to an annual maximum.

Investment income is taxexempt, while pension benefits are taxed at the ordinary income tax rate above a certain threshold.

Employer contributions are not taxable income for the employee if:

• The pension plan is externally funded;
• The pension plan provides vested claims;
• The pension plan does not discriminate;
• Benefits are paid as Annuities only and thus not as Lump Sum;
• Benefits are paid at the same time as social security benefits.

Annuities paid by an Insurance Company or a Pension Fund are taxable income for the retired employee if the contributions to such a plan were tax exempt.

Otherwise, only the interest earned and not the original contribution is taxable as pension income. Regarding Lump Sum payments upon retirement, the interest part will be taxed as investment income.

II. Providers

Pension plans are offered by the following providers:

• Pension Funds;
• Insurance Companies.

Most companies use a Pension Fund. Insured plans are often used by smaller companies.

Regarding Pensions Funds the following details are relevant:

• There are two versions: The closed and open fund;
• A Closed Fund regards one company or a collective of companies or by agreement between Employers and Unions.
• An Open Fund accept and manages capital from every unrelated pension plan.
• Closed Funds are the popular form providing mostly guaranteed benefits (DB).
• A pension fund has to be managed by a Pension Fund Managing Society specifically created for this task or by a Mutual Society or by an Insurance Company.
• Pension Fund Managing Societies manage 95% of all capital. The four biggest managing societies have a market share of 70%.

Regarding Insurance Companies the following details are relevant:

• Direct insurance plans have the same tax treatment as Pension Funds.
• The investment of assets by Insurance Companies is strictly regulated, imposing both minimum and maximum levels for investments in different asset categories.

III. Nature Of Plans

The nature of pension plans can be:

• Guaranteed Defined Benefit (DB);
• Investment based Defined Contribution (DC);
• Hybrid and thus a combination of DB/DC.

Even though many plans have a DB nature, there is a trend towards DC plans.

IV. Retirement Age

The regular retirement age is 66 years and five months in the private and public sectors.

V. Pay-Out

There are two kind of pay-out options:

• Lifelong Annuity;
• Lump Sum.
• Certain tax benefits are only provided if the pay-out is annuity based.

Voluntary personal pension saving arrangements appear in the following versions:

I. Personal Retirement Saving Plans

Financed by Insurance Contracts, Pension Funds or Investment Funds.

II. Individual Membership Open Pension Fund

Individual contracts that specify contributions to a Pension Fund in exchange for which the benefits will be paid when members reach a specific retirement age.

In Portugal the occupational pensions and insurances receive governmental regulation and oversight from the ASF: Autoridade de Supervisao de Seguros e Fundos de Pensoes.

Until 2015 it was called: Instituto de Seguros de Portugal (ISP).

For more information: https://www.asf.com.pt/isp/SiteAtualizacao.html

I. State Pensions

The standard retirement age is age 66 and 5 months. It is expected to steadily increase to age 67 as of 2029. A minimum of 15 years of contributions is required for retirement at age 66 and 5 months.

Early retirement is possible as of 55 if one has 30 contributing years. Then the pension pay-out is reduced for every year it is drawn sooner. For every year retirement is postponed after age 66 and 5 months, the pension amount will be increased.

As of age 70 the pension starts to pay-out at any rate.

II. Occupational Pensions

The regular retirement age is 66 years and five months in the private and public sectors.

I. State Pensions

• The pension pay-out starts at any rate between age 55-70.
• There is only the Annuity nature pay-out. No Lump Sums.

II. Occupational Pensions

• These plans mostly follow the governmental retirement age.
• The pay-out can be an Annuity or Lump Sum. (Certain beneficial tax rules demand a pay-out as Annuity.)

I. State Pensions

Expats who have acquired Portugese State Pension Claims can receive the pay-out as of retirement age in another country.

A transfer of value is never possible regarding State Pension Claims.

II. Occupational Pensions

Expats who have acquired Portugese Occupational Pension Claims can receive the pay-out as of retirement age in another country.

It is not always possible to transfer a Portugese Occupational Pension Claim abroad to a new Occupational Pension Claim. As the EU tries to stimulate Member States to make this possble, this might have a positive effect in the near future.

I. Residents

Residents will be taxed for their Global Income.

The 2021 Portugese Income Tax rate has the following progression:

            Taxable  Income                                             Rate                

• €          0           -           €     4,793                    11,08   %
• €   4,793          -           €     7,250                    13,58   %
• €   7,250          -           €   17,979                    24,08   %
• € 17,979          -           €   41,389                    34,88   %
• € 41,389          -           €   59,926                    37,38   %
• € 59,926          -           €   64,623                    40,88   %
• € 64,623          -           € 150.000                    42,88   %
• As of € 150,000                                                46        %

II. Expats/Non Habitual Residency (NHR)

The NHR tax regime in Portugal offers certain highly interesting tax benefits:

• Several types of non Portugese income will not be taxed in Portugal.
• Non-residents are taxed at a flat rate of 25% on their taxable wages.
• Professionals who are ‘highly skilled’ might have the 20% flat income tax rate.
• As of 2019 foreign pensions are taxed at a 10% flat income tax rate.
• Expats who received their NHR status before April 2020 and receive UK pensions, will meet no taxation of these pensions for the remainder of their 10 year period.

III. International Tax

If you receive pension pay-out from another country than the country where you retire, then it is advisable to see if there is a Double Tax Treaty in order to prevent or mitigate double taxation in the residenital country and at source.

If there is no such treaty, you can only appeal to unilateral national rules in order to try to prevent the effect of a possible double taxation.

IV. Wealth Tax

If you are the owner of Portugese property and if your entitlement has as value above

€ 600,000 than you have to pay an indicative 0,7% / 1% local Wealth Tax on the value above

€ 600,000 / € 1,000,000.

If you are resident or not does not matter for this taxation.

V. Inheritance Tax

Portugal abolished the inheritance tax but a 10% rate Stamp Duty may apply.

If you have to pay tax on inheritance in Portugal, you have to do so within three months from the date of passing away. Paying late might lead to fines.

To help reduce the burden paid by Expats, Portugal has double taxation treaties with many countries. Thus you can offset the tax paid in Portugal against any you might owe in your home country.

I. State Pensions

Expats living in Portugal can receive State Pension from another country.

They can also receive Portugese State Pensions if they quality. In that perspect they need to have at least 15 years of social security contributions but such contribution to other EU Member States can be included pro rata.

Expats who are entitled to a Portugese State Pension can receive this pay-out while retiring in another country.

II. Occupational Pensions

Expats who have acquired Portugese Occupational Pension Claims can receive the pay-out as of retirement age in another country.

It is not always possible to transfer a Portugese Occupational Pension Claim abroad to a new Occupational Pension Claim. As the EU tries to stimulate Member States to make this possble, this might have a positive effect in the near future.

III. Tax

If you receive pension pay-out from another country than the country where you retire, then it is advisable to see if there is a Double Tax Treaty in order to prevent or mitigate double taxation in the residenital country and at source.

If there is no such treaty, you can only appeal to unilateral rules in order to try to prevent the effect of a possible double taxation.

Expats with a UK Occcupational Pension Claim often hear that it is very attractive to transfer their UK claim to a QROPS pension plan.

QROPS stands for ‘Qualifying Recognised Overseas Pension Scheme. A QROPS is an overseas pension scheme that HM Revenue & Customs (HMRC) recognises as eligible to receive transfers from registered pension schemes in the UK.

The initial idea of a QROPS was to get the value out of the UK without paying any UK tax on the transfer value. Which is now not always possible.

To qualify as a QROPS the scheme must meet the requirements set by UK tax law. For example being available to residents in that country and not being accessible before age 55 unless under special circumstances.

If you are interested in such a QROPS transfer, please make sure that a specialist looks into all relevant aspects. Among which there are the following questions:

• Would it result in a much lower tax exposure or would it increase substantially?
• Are the related QROPS costs not too high?
• Is the related transfer capital big enough to earn back the extra costs?
• Are the available investment funds of a quality level?
• Does your advisor have financial benefit from such a transfer by getting a percentage of the transfer value? (For Dutch advisors this is prohibited by law, fortunately.)

Sweden: Tax Pensioners In Portugal

Swedish Parliament is set to vote on unilaterally ending an agreement with Portugal to not tax citizens receiving their pensioners there.

Following in the footsteps of Finland in 2018, Stockholm now also wants to see its expat pensioners in Portugal taxed as they would be in their home countries.

Portugal recently changed its non-habitual resident regime to enforce a blanket ten percent tax on foreign pensions, but Sweden argues this is inadequate and not in accordance with an agreement signed with Lisbon in 2019.

A logical step and I expect many EU countries to follow!

 

I. New Law Ups ESG Governance Requirements In Portugal

A new law has been introduced for Portuguese occupational pension funds requiring them to prepare a statement of investment policy principles detailing their approach to risk and to environmental, social and governance (ESG) factors.

The law, which took effect in 2020 said the statement must include the methodology for assessing investment risk; risk management processes applied; and the asset allocation strategy followed, taking into consideration the type and duration of pension liabilities, as well as ESG factors.

The statement must be published on the pension plan managers’ website and be reviewed at least every three years.

The new law also significantly extends the information to be provided to members and prospective members, including fund contributions and expenses during the previous 12 months; accumulated pension balance; pension fund manager fees; fund investment returns; and projections of estimated member benefits at retirement age.

There are also provisions for more employee involvement in schemes.

Pension plan monitoring committees must now include a representative from the company’s workers’ commission (works council) and representatives from the two most significant unions in the industry sector.

The monitoring committee oversees a pension plan’s management though it has no decision-making powers.

In addition, elections to appoint members and beneficiaries’ representatives to the committee are still required for all pension plans. There is an existing requirement for elections to appoint members’ and beneficiaries’ representatives to the committee.

The new law also introduces new options for members, on moving jobs or retirement, to maintain their savings in the employer’s plan, or transfer them to another fund.