Pension Planning for Israeli Residents

Recent changes in Israel tax practice may affect you adversely, if you are resident in Israel and receiving pension income from a UK registered pension scheme.

Previously, new Israel residents could, as a result of the UK/Israel double tax treaty benefit from low rates of tax in Israel on their pensions for the first 10 years of residence (or 5 years for pre 1st January 2007 cases) -  with pensions being paid gross from the UK.  Typical tax rates paid were 10% - or 6.5% if aged 67 or over.

It now appears, however, that the Israeli tax authorities treat such UK sourced pension income as “tax-exempt” in Israel.

As a result, it is our understanding that the benefits of the double tax treaty can no longer be relied upon.  Therefore, this change in practice may result in some UK sourced pension income becoming liable to full UK taxation - with no facility to enjoy full tax relief at source.   Liabilities to UK taxation may have arisen already.

It is possible to improve the situation, where pension savings accrued in a UK Registered Pension Scheme are transferred to an appropriate Qualifying Recognised Overseas Pension Scheme - a “QROPS”.

In particular, some overseas territories may permit pensions to be paid gross to non-residents. If UK pension savings are transferred to a QROPS in such a territory, the result could be that a new Israeli resident may not incur tax in Israel on pensions payable from the QROPS – for up to the first 10 years of Israel residency  - but thereafter normal Israeli taxation should apply.

Each case is different and requires specific tailored advice. The issues are complex and the rules ever changing. It is not obvious that a QROPS is always appropriate as for smaller pension funds charges may outweigh tax benefits. The nature of the UK pension scheme and the underlying investments must also be taken into account.

If you believe that you are or may be affected by the above changes, then we would suggest that you seek appropriate pension  and tax advice.

Our firm has considerable specialist experience in advising clients resident in Israel – and in other locations on the optimum solution for their pension arrangements and the suitability of QROPS.  We work closely with reputable and expert local tax advisors to ensure that our clients’ needs are addressed fully.

If you would like to  discuss this further, please contact us.