Planning for Expat Retirement in Cyprus

If you’re planning to relocate to enjoy an idyllic coastal lifestyle in Cyprus, one of the essentials to put on your list is a pension review. While we know that pension planning isn’t always the first thing that comes to mind amid property searches and packing, this is a vital component to ensure you have a stable, secure financial future overseas.

There are multiple potential routes to claiming pension benefits for expats moving from the UK to Cyprus. The best solutions for you will depend on the type of pension products you have, when you expect to retire and how you want to utilise your pension savings – among several other considerations.

We do not advocate any particular route without first discussing your circumstances, the value of your pension, and what type of plan you have since these are all important factors in creating a tailored retirement strategy.  For bespoke advice and more information about any of the options explained here, please contact our local Cyprus team or our UK Administration Office.

UK Pension Planning for Expats in Cyprus

For most expats, there are three main options when it comes to organising your pension fund ahead of a relocation from the UK to Cyprus:

• Leaving UK products as they are and drawing your pension from Cyprus.
• Transferring your pension to an overseas alternative.
• Doing something entirely different, such as drawing your pension as a lump sum and investing it elsewhere.

There are several key questions around your individual circumstances that may influence your decisions, such as whether your pension is a defined benefit or defined contribution plan.

Defined benefit pensions have the lucrative advantage of a guaranteed income for life. However, they can have limitations, which means you might not be able to draw a lump sum to purchase a new Cypriot home, for example.

Defined contribution schemes are more flexible, so it’s up to you whether you want to receive your pension as a regular payment or draw on a chunk of your pension pot for other uses. However, these schemes have a finite value, so when the fund is exhausted, it will close.

In some scenarios, it might be worth transferring a defined benefit pot into a defined contribution scheme, but it is wise to approach this decision with caution. It is, in fact, a regulatory requirement that you seek independent financial advice before making this move. Sacrificing lifetime benefits is a risk, so it’s critical you have sound advice before following this strategy.

The main takeaway is that there isn’t a one-size-fits-all answer, and planning for your expat pension demands a tailored approach to ensure the solutions you select match your retirement aspirations.

Drawing a UK Pension Scheme from Cyprus

If you choose to, you can leave your UK pension funds exactly where they are. There isn’t any requirement to transfer a scheme, so it’s at your discretion whether your British retirement funds are left in situ or moved overseas. However, this option isn’t without risk, and there are several things we’d consider.

Pension Fund Exchange Rate Risks

Drawing pension income in Cyprus from the UK will, inevitably, come with an exchange rate risk. Your British pension will usually be paid in GBP, but will be converted into Euros if paid to a Cypriot bank.

Sometimes, exchange rates will be advantageous, and sometimes not – but regardless, you will lose some of the income due to the transactional fees linked with an international money transfer.

Cyprus Residency Status

If you live in Cyprus long-term and are a registered resident with tax-residency status, you may find that generous income tax rates mean you can retain more of your pension benefits.

However, if you’re a non-resident, you may still be liable for taxes at the UK rates and remain exposed to any changes in personal allowances or tax bands.

UK State Pension for Expats in Cyprus

We’ve briefly explored above the contrasting pros and cons of different scheme types – while acknowledging that we’ve looked briefly at just a fraction of the potential pension structures you might have.

Another consideration is the UK State Pension. If you have made the requisite National Insurance contributions and are entitled to the State Pension, you can still receive this overseas. However, the value will depend on currency exchange rates since the State Pension is always remitted in GBP and must be exchanged for Euros to be drawn down from a Cypriot bank account.

Cyprus Pension Income Taxes

As a Cypriot tax resident, you pay income tax at local rates – unless you receive a Civil Service pension, which is taxed at source in the UK. Paying taxes in Cyprus is often beneficial, since there are two tax treatments you can choose between. These are:

• Opting to pay tax at 5% of your pension, against anything above €3,420.
• Choosing to pay taxes against the regular income tax bands.

The lowest income tax band kicks in at an annual revenue of €19,501 – so if your yearly pension is below this, you may be better off with option two since this would attract zero tax.

The current tax rates in Cyprus are as below:

The benefits of Cypriot taxation mean that many UK expats opt to apply for official residency status or ensure their living arrangements meet the 183 days plus requirement to be treated as tax residents.

Transferring a UK Pension Fund to Cyprus

Another potential solution is to look into a pension transfer. There are two primary options: transferring into a Self-Invested Personal Pension (SIPP) or a Recognised Overseas Pension Scheme (ROPS). You can only pick the latter if the scheme is recognised on the HMRC List of approved ROPS funds.

Note that there are currently no ROPS on the HMRC register in Cyprus – but that doesn’t mean you can’t select another fund in a neighbouring EU country, with many such schemes based in Malta.

ROPS transfers can offer advantages, making them an appealing option with tax efficiencies and flexibility that you won’t get if you leave your UK pension as-is. These include:

• Options to combine multiple pensions into one ROPS plan.
• Protection from UK taxes and changes to pension regulations.
• Flexibility to choose how you invest and access your pension pot.
• Improved succession planning benefits.
• Ability to invest and draw your pension in multiple currencies.

A significant factor in a ROPS transfer is that you may be liable to pay tax on the value transferred. A lot, therefore, depends on whether that tax burden is likely to be lower than the tax you’d otherwise pay against your UK pension income. SIPPs remain based in the UK, so carry no such transfer tax liability.

International pension transfers may attract the Overseas Transfer Charge, which HMRC can potentially levy at 25% on pension fund transfers outside of the UK. However, this tax is slightly ambiguous since it technically applies to all EU transfers post-Brexit but isn’t yet applied as standard – it remains a factor to keep in mind.

There is also the potential exposure to taxation under the Overseas Transfer Allowance (OTA) rules, which came into force when the previous Lifetime Allowance (LTA) was officially abolished in April 2024. In effect, a pension that is transferred overseas and exceeds the OTA – £1.073 million, equal to the LTA – may attract an additional tax charge of up to 25% on the excess.

Planning for Expat Retirement with Confidence

There are variable pros and cons, risks and rewards. You must have expert financial advice before making any long-term decisions about managing your UK pension from Cyprus.

Whether you have a sizeable pension fund and wish to protect the value of your retirement savings or want to explore the potential returns on alternative investment products, it remains vital to seek expert guidance.

Contact our office in Paphos for access to on-the-ground expertise and arrange a good time to chat with one of the Chase Buchanan team.

*  Updated June 2024