The Federal Central Tax Office (BZSt) is the name of the tax authority in Germany. They have specific rules on how they tax foreign pensions which can significantly alter the amount of tax you have to pay. For British Expats who are residing in Germany, it is important to understand the tax rules, so you don’t get penalised by the local authorities. This page will illustrate what your best options are for your UK pension as well as explaining what the local tax rates are and who they apply to. The areas we will cover include:
- Defining a Germany Resident
- Germany Tax Position for Residents
- Tax relief for German Residents
- German Tax Position for Non-Residents
- Social Contributions in Germany
- Capital Gains Tax (CGT) and Dividends
- Inheritance and Gift Tax
- Value Added Tax (VAT)
- Corporation Tax
- Options with your UK pension
- Leave your Pension where it is
- SIPPs in Germany
- QROPS in Germany
It is important to note that the information provided on this website is just a guide, hence before making any decisions it is always advisable to talk to an independent financial adviser, who can fully understand your situation and explain what is best for you. CLICK HERE to get in touch.
Defining a Germany Resident
The tax year in Germany runs from the 1st January to the 31st December.
You are deemed a tax resident in Germany if you are physically present in the country for more than 6 months in a calendar year or a consecutive period of 6 months over calendar year-end. You may also be deemed tax resident in Germany if you acquire an abode, such as renting a property with a contract longer than 6 months. For this reason, it is usually advisable to rent for less than 3 months to avoid confusion with the tax authorities.
Germany Tax Position for Residents
Residents are liable to pay tax on worldwide income, regardless of the source. This includes all income such as earned income, rental income, capital investment income, and even income from a limited company. Essentially, any earnings are taxed as income except for interest, dividends, and capital gains.
Everyone must file an annual tax return with their local tax authority in Germany by the 31st March, or 31st December if you are using a tax adviser. You can be fined up to 10% of the tax due with a cap of €25,000 for late filing.
Employees are taxed under a PAYE system like the UK, meaning that their tax is withheld at source. Employees under the PAYE system, therefore, do not need to file a tax return unless they receive income from more than one employment or from other sources which equate to more than €410.
The tax system in Germany is progressive and differs depending on whether your marital status is single or married.
2020-2021 income tax bands are as follows for annual earnings between:
|Single Taxpayers||Tax Rate|
|€0 – €9,408||0%|
|€9,408 – €57,051||14%|
|€57,051 – €270,500||42%|
|€270,500 and above||45%|
|Married Taxpayers||Tax Rate|
|€0 – €18,816||0%|
|€18,816 – €114,102||14%|
|€114,102 – €541,000||42%|
|€541,000 and above||45%|
- There is a 5.5% solidarity surcharge on all individual income taxes, regardless of how much you earn
- Members of recognised churches pay an additional surcharge of between 8-9%, depending on the state.
Tax relief for German Residents
All taxpayers are divided into different tax brackets to determine the rates of tax they pay. This provides tax relief depending on your circumstance. The tax brackets are as follows:
- Tax bracket 1 – Applies if you are single and not eligible for tax relief as a single parent. Also applies to divorced partners.
- Tax bracket 2 – Applies to single parents who are entitled to tax relief for single parents.
- Tax bracket 3 – Applies to a spouse who does not work or earns considerably less.
- Tax bracket 4 – If both spouses earn roughly the same amount of income.
- Tax bracket 5 – Jobholders who are married.
- Tax bracket 6 – Applies to people with two jobs.
German Tax Position for Non-Residents
A non-resident is someone who spends less than 6 consecutive months in Germany. Non-residents are only liable to pay tax on German sourced income, not on worldwide income. Unlike many countries, Germany taxes non-residents the same as residents.
Social Contributions in Germany
Social contributions in Germany are compulsory for employees who cover health care, pensions, long-term care insurance, and unemployment insurance. Employees are subject to compulsory social security contributions which are withheld by the employer. Employees and employers split the contributions 50/50 (employee pay 53% with Health contributions). The following rates in 2020-2021 apply:
|Contribution rates||Maximum contribution per year|
|State Pension||18.7% (equally split between employee and employer)||€58,800-€69,600 depending on area|
|Health Insurance||14.6% – 16.1% (depending on provider)||€60,750|
|Unemployment||2.5% (equally split between employee and employer)||€74,400|
|Long-term care||2.55% (2.8% for people without children)||€50,850|
Please note, self-employed persons don’t need to pay social contributions.
Capital Gains Tax (CGT) and Dividends
Capital gains and dividends are taxed at a flat rate of 25% in Germany plus a 5.5% solidarity surcharge.
Inheritance and Gift Tax
Inheritance and gift tax are a tax on lifetime gifts and the passing of assets upon death. This tax applies to German residents and non-residents where they have assets situated in Germany. Rates are progressive and can vary depending on the relationship between the deceased and donor. The current rates in 2020-21 are as follows:
|Category 1||Category 2||Category 3|
|€0 – €75,000||7%||15%||30%|
|€75,000 – €300,000||11%||20%||30%|
|€300,000 – €600,000||15%||25%||30%|
|€600,000 – €6,000,000||19%||30%||30%|
|€6,000,000 – €13,000,0000||23%||35%||50%|
|€13,000,0000 – €26,000,000||27%||40%||50%|
|€26,000,000 and above||30%||43%||50%|
It is important to know what category you are as it can seriously affect the amount of inheritance tax that you pay.
Tax-free allowances are given depending on the heir’s relationship to the deceased. 2020-21 allowances are as follows:
|Children, stepchildren, grandchildren/great-grandchildren||€400,000|
|Grandchildren/great-grandchildren of living children||€200,000|
|Parents and grandparents||€100,000|
|Siblings, nieces/nephews, stepparents, relatives by marriage, divorced spouse||€20,000|
Value Added Tax (VAT)
The tax on goods and services is levied at 19%, which is the EU standard. Special rates of 7% apply to certain items such as food and books.
Corporation tax in Germany is 15%. Solidarity surcharges and municipal trade taxes also need to be paid which means the total rate businesses will pay can range between 30-33%.
UK Pension Options
1. Retain the existing benefits
2. Transfer to an overseas scheme (ROPS)
3. Transfer to an alternative UK scheme (SIPP)
1. Retain the existing benefits
For many people, leaving your pension where it is might be the best option, depending on whether you have a defined contribution or defined benefit pension. Some pensions have very good guarantees before and after retirement as well as on death. Other pensions may have restrictions about how you can access your funds, high fees, limited investment, and currency options among other things.
Understanding what your pension offers you as well as understanding what your needs and objectives are is important before looking at other options as your pension could be suitable where it is currently based. We provide a free initial consultation to first understand what type of scheme you have in order to give you a fair understanding of whether it is worth looking into alternative options.
CLICK HERE to complete the form at the bottom of the page and open a no-fee, no-obligation discussion with us about your financial situation. Some of the main reasons people look at moving away from their scheme are listed below:
a. Defined Contribution pensions – some of the main reasons people transfer
- Avoid purchasing an annuity – Many UK schemes only allow the option to purchase an annuity such as Prudential, Scottish Widows, Canada Sun Life, and many more. At the time of writing, annuity rates are at record lows, meaning you must live around 40 years to get your money back. They also provide no flexibility and is the main reason pension freedoms came into play to give people the freedom to transfer to more flexible schemes such as a SIPP or QROPS.
- Multi-currency options – UK pensions only have the option to have your pension denominated in Sterling, whereas SIPPs and QROPS allow multi-currency. This has become ever more important in times when Sterling has weakened against its peers and retirees who are relying on an income in any other currency other than Sterling have seen their income drop by 30% over the past 3-4 years due to currency fluctuations alone. If this reduction ends up reducing your income below your means of living, then you may find yourself going back to work in retirement.
- Diversified investments – UK pensions are only invested in UK markets. This can have a detrimental effect on your returns as seen below:
- The FTSE 100 (UK stock market) has returned 54% between March 2009 to August 2020
- The S&P 500 (US stock market) has returned over 470% over the same period
Clearly, it makes sense to have the option to diversify and invest outside of the UK market, both of which are options if you transfer to a SIPP or QROPS.
- Consolidating pensions into one pot – Should you have various pensions with different providers then it can be difficult to manage pre- and post-retirement. Consolidating them into one place with online access and a financial adviser providing regular updates can help you manage your pensions much more effectively. CLICK HERE to contact us today.
b. Defined Benefit pensions – some of the main reasons people transfer
- Greater Flexibility – Defined Benefit Schemes offer a guaranteed income for life from your normal retirement date. This is a good guarantee that is lost if you transfer away. However, a guaranteed income is rigid and cannot be changed once you begin to receive your pension. Transferring to a SIPP or QROPS allows you to have many flexibilities, such as:
- You can access your pension earlier or defer it to a later date without penalties, unlike a DB scheme.
- You can invest in any regulated investment.
- You can take 100% of your pension as a lump sum, providing you are over 55.
- You can increase or decrease your income. Reasons could be:
- You become ill and want to spend the money while you can.
- You never want to access the funds and therefore pass them to your family.
- You can decrease or stop your income if you find part-time work or receive an inheritance in retirement.
- There are many other reasons.
- You can take ad-hoc lump sums through retirement. Reasons could be:
- To give money to a loved one.
- To go on holiday.
- To buy a property.
- You can take your 25% pension commencement lump sum and then defer taking the rest of your pension until whichever age you wish. The reason could be:
- You want to pay off your mortgage and then defer taking the rest of your pension until you are retired.
- Purchase an investment property or business idea and then defer the rest of your pension until you are retired.
- High cash equivalent transfer values – Transfer values have increased significantly over recent years because the amount you receive is closely linked to UK gilt rates. As interest rates have been held at record lows and the government has been buying bonds through “quantitative easing” for such a long time, bond yields have fallen to record lows.
Your scheme will provide you with a “Cash Equivalent Transfer Value” (CETV) which is the amount of money the scheme requires to purchase your guaranteed income in today’s money. As yields fall, transfer values go up. If yields fall too much, schemes will struggle to pay guarantees as the performance of the assets they hold could become lower than the amount of money they need to pay for your guarantees. What once was a benefit, could in turn become a drawback, as schemes have the right to offer a reduced transfer value should they be unable to pay members benefits.
Therefore, if you are ever going to make a decision to transfer your pension, now is the time. This is extremely valuable and is a very good reason to consider transferring away from your scheme while this offer is still available. CLICK HERE to get in touch with us today and find out what your transfer value could be.
- Reduced Life Expectancy – Although this is a very morbid thing to think about, it is an important factor to consider when reviewing a defined benefit pension. The analysis you receive will compare the income from when you retire until you die and work out whether you would be better off in the scheme you are in or in a SIPP or QROPS. Advice is calculated using the average life expectancy for both males and females in the UK. Therefore, if the life expectancy is much lower in your family, spending more in earlier years becomes much more important as you can access 100% of your pension from age 55 in a SIPP or QROPS. This means that should you become ill, you can spend your pension before you die or pass 100% of the remaining pension to your loved ones.
- Avoid pension going into the PPF – The pension deficit of defined benefit schemes has been increasing significantly over the past decade. Many large defined benefit schemes have gone into liquidation over the past few years such as BHS, British Steel, Carillion, and many more. When schemes go into liquidation, they enter the pension protection fund (PPF) meaning you automatically lose 10% of your pension and potentially much more. In many instances, some of your guaranteed increases could also be lost completely. It is important to note that the PPF is not backed by the treasury and could also go into liquidation should too many schemes enter. The PPF as of June 2020 is in fact in deficit. Upon transfer to a SIPP/ROPS, you will be protected against your scheme going into liquidation. Your funds are completely ring-fenced inside a SIPP/ROPS, meaning that if the SIPP/ROPS trustees go into liquidation, your funds are completely protected.
There are many other benefits and drawbacks in addition to the ones mentioned above. Some schemes have restrictions or penalties to transfer away which may defer a transfer being in your interest. We help you understand whether it is worth looking into alternative options and if it is, we can then access whether a QROPS or SIPP would be more beneficial.
Help us to help you by filling in the form below or CLICK HERE.
2. Transfer to an overseas scheme (QROPS)
A QROPS stands for Qualifying Recognised Overseas Pension Scheme; an alternative pension that accepts transfers from a UK defined contribution and defined benefit scheme. German residents qualify for a transfer to a QROPS; however, in 2017 the government announced a 25% overseas transfer charge to anyone who transfers to a QROPS that is based outside of the EEA.
Following the UK government spring budget on 8th March 2017, HMRC released an update in their Pension Schemes Newsletter on a few key points, including the QROPS rules, which we need to bring to your attention:
Transfers to QROPS requested on or after the 9th March 2017 will be subject to a 25% tax charge, unless;
- The ROPS is in the EEA and the Member is also resident in an EEA country
- Subject to the 5-year rule, where the exemption proceeds no longer apply, the 25% charge can be retrospectively applied. However, curiously, within the newsletter from HMRC, they confirm that “A change in member’s circumstances within 5 years may result in a change to the tax treatment of the original transfer and could lead to a repayment being due.”
The benefits of a QROPS are as follows:
- Payments from a QROPS are from UK income taxes
- You will be entitled to a 30% lump sum from the age of 55.
- You will be able to withdraw from your pension via drawdown or Flexi-access in Malta but not in Gibraltar.
- You can withdraw 100% of your pension from age 55.
- Much greater investment choice.
- Have your pension denominated in any major worldwide currency.
- You will no longer be subject to UK pension legislation changes.
- There is no lifetime allowance.
- UK pension death tax does not apply.
- Fees are much more expensive than a SIPP.
3. Transfer to an alternative UK scheme (SIPP)
SIPP stands for ‘Self Invested Personal Pension’. It is recognized as an international pension scheme that HM Revenue & Customs (HMRC) identifies as eligible to receive transfers from registered pension schemes in the UK. To qualify as an international SIPP, the scheme must meet the requirements set by UK tax law and you must be a non-UK resident.
SIPPs can receive the transfer value from your scheme and then the funds are invested to provide you with retirement benefits at any time from age 55.
Most SIPPs are ‘money purchase’ or ‘defined contribution’ schemes where the member knows how much they are investing, but not what they will receive, because the pension fund size will depend upon the performance of the underlying investments of the SIPP. The performance is not guaranteed.
A major benefit of a transfer to one of these arrangements is that your pension fund does not force you to buy an annuity and could therefore be passed on to a nominated beneficiary on your death – in some cases, free of UK tax. Additional benefits would include wider retirement options, greater investment choice, ability to have your fund managed by an overseas IFA, choice of any major currency denomination, plus more:
- Payments from your UK pension will be taxed as ‘earned income’ at source by HMRC, although this can be avoided, although this can be claimed back under the double taxation treaty.
- You will be entitled to a 25% lump sum from the age of 55.
- You will be able to withdraw from your pension via drawdown or Flexi-access.
- You can withdraw 100% of your pension from age 55.
- Much greater investment choice.
- Have your pension denominated in any major worldwide currency.
- You will be subject to any UK pension legislation changes.
- Lifetime allowance of £1,073,100. Anything in excess can be taxed up to 55% or 25% depending on how you take your benefits when you retire.
- UK pension death tax applies to UK pensions regardless of where you are resident. This means if you die after the age of 75, your pension will be taxed at your beneficiary’s marginal rate on receipt up to 45%. This may also be claimed back from HMRC and avoided in most circumstances.
Comparison of SIPP vs QROPS
- There could be a 25% overseas transfer charge applied to a ROPS transfer if you don’t live in the EEA or you move outside of the EEA within 5 years of the transfer. This is not applicable to a SIPP transfer.
- Both a SIPP and ROPS does not force you to buy an annuity.
- They both offer the ability to take benefits through drawdown or flexi-access.
- They both allow you to hold your pension fund in any major currency of your choice.
- They both can be managed by an independent financial adviser.
- A SIPP has a lifetime allowance of £1,073,100 that increases by inflation unless you have lifetime allowance protection, whereas a ROPS has no lifetime allowance.
- A SIPP is cheaper than a ROPS.
- A SIPP is FCA regulated whereas a QROPS is regulated by either the MFSA or GFSC.
Taxation on UK Pension
There is a new DTA between the UK and Germany (effective from 2011). This provides that pensions, other similar remuneration, or annuities arising in the UK and paid to a resident of Germany shall only be taxable in Germany (as country of residency). On this basis, if the pension is left in the UK, no UK tax should be due on the UK pension income payments if the provisions of the DTA are satisfied, with tax payable at up to 45% in Germany (as country of residence). Here at SJB Global, we are able to help you obtain an NT tax code which would avoid the deduction of UK income tax at source, meaning your pension is paid gross of UK income tax. You would therefore only be liable to income tax in Germany.
Transfers affected by the Overseas Transfer Charge
It is important to note that not all QROPS pension transfers will be subject to the new overseas transfer charge. However, if you request a transfer on or after the 9th March 2017 AND any of the following criteria apply to you, you will be required to pay 25% of the value of the transfer in advance:
- You are not a tax resident in the EEA and the pension transfer is to a QROPS in a country other than your country of residence (i.e. if you are a tax resident in the UAE and your QROPS is in Malta).
- You are a tax resident in the EEA and the pension transfer is to a QROPS outside of the EEA (e.g. you live in France and your QROPS is in Australia)
- You (the member) have not provided all the required information before the transfer is complete
- You requested your pension transfer before 9th March 2017, but it was not completed, and the funds were then sent to a different QROPS which was not the scheme included in the original request.
- When the transfer was requested you were either transferring your pension to a QROPS in your country of residence, or you were a tax resident in the EEA and transferring to a QROPS also in the EEA, however, within five years of the transfer your circumstances change such that you no longer meet the above criteria. For example, if you move outside the EEA or transfer your QROPS funds away from your country of residence.
Transfers not affected by the Overseas Transfer Charges
If the following criteria apply to you, you will not be subject to the overseas transfer charge:
- Your pension transfer is to a QROPS in the EEA and you are a tax resident within the EEA (i.e. any country within the EU, including Germany, plus Liechtenstein, Norway and Iceland, and Gibraltar)
- Your pension transfer is to a pension scheme in your country of residence (e.g. if you are a tax resident in Australia and you transfer your pension to an Australian QROPS)
- Transfers which are subject to unauthorized payments because they are not recognised transfers
- You are a former employee of an international organization that has set up a QROPS specifically to provide benefits for former employees
- You are transferring to a QROPS which is an overseas public service pension scheme you are employed by an organisation participating in that pension scheme.
- You are an employee of an organisation sponsoring an occupational pension which qualifies as a QROPS
Should I transfer to a SIPP or QROPS?
Should you wish to understand whether a transfer to a SIPP or QROPS would be in your interest and potentially which option would be better suited, please complete the form below, and one of our specialist independent financial advisers will contact you to discuss further. Please note, there is no cost or obligation to take the call.
*Please note: The information provided is general information based on our understanding of the current German tax legislation as of October 2020. Should any of the information be inaccurate or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist advice before making any decisions.
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