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Pensions for Expats in Portugal

Submitted: September 2014

Portugal’s pension system is essentially financed by means of social insurance contributions. It is not designed to be egalitarian, though there are a few redistributive effects. Entitlement therefore primarily depends on your previous contributions into the system.

Private pension schemes are not commonplace in Portugal. Only about 150,000 Portuguese workers are signed up for occupational pension schemes.

 

Public pension system

Social security coverage

All workers in Portugal are subject to social insurance legislation, which is designed to cover various benefits, including notably:

To this effect, mandatory contributions must be paid to the Social Security Institute (Instituto da Solidariedade e da Segurança Social), although there are sector-specific schemes. Both employees and the self-employed must be covered.

However, expats may keep being subject to the social security legislation of their home country in certain cases (e.g. temporary assignment, etc.), meaning no contributions need to be paid in Portugal. Such treatment may be provided for by:

 

Contributions

In 2014, the overall contributions to the Portuguese basic social security coverage are as follows:

  Rate (%)
Employees 11
Employers 23.75
Self-employed 29.6

Under Article 25 of the Personal Income Tax Code, employees are entitled to the following tax deductions in relation to social security contributions:

 

Entitlement to pension benefits

In order to qualify for a basic state pension, you must:

After 2015, the pension age will be automatically updated in accordance with the evolution of life expectancy.

How much you can get depends on:

If you have worked for more than 40 years, only the 40 best years will be taken into account.

 

Redistributive effects

The most important redistributive effects within the Portuguese contribution-based system are:

 

Additional benefits

The elderly – generally those who have reached pension age – may be eligible for additional benefits in Portugal, most of which are means-tested and tax-financed. These include:

In general, means-tested benefits are conditional on being resident in Portugal.

 

Voluntary retirement saving

Overview

In Portugal, private pension schemes are not common. Some long-term investment products may be available at Portuguese banks, but pension provision is primarily the responsibility of the Portuguese Social Security.

Workers may contribute towards an additional state pension, which is also administered by the Portuguese Social Security Institute. The additional state pension may be paid as an annuity, or as a lump-sum.

Unlike the basic state pension however, the additional state pension is much less on a pay-as-you-go basis. Each contribution you pay is immediately converted into units, the value of which increases over time. Hence the additional state pension is called a “public capitalisation scheme” (Regime Público de Capitalização – RPC).

Contributions to the RPC can be 2, 4 or 6% of your assessable income for social security purposes. The 6% rate is available only for contributors aged 50 or over.

 

Tax treatment

A tax credit of 20% of your RPC contributions may be available, up to €350 per year. From 2013, the RPC tax credit is part of a number of tax credits under the tax incentives statute (Estatuto de beneficios fiscais). These expenditures are subject to an overall tax credit cap which starts at €100 for individuals whose income exceeds €7,000.

A 20% tax credit is also available in respect of pension savings plans (Planos de poupança-reforma – PPR). PPRs are available from Portuguese banks.

The tax credit cap is quite harsh. It means there is virtually no tax benefit unless your income in the relevant year is close to nil.

 

International matters

Social security agreements

Portugal may have entered into a social security agreement with your home country. These agreements are primarily designed to avoid discrimination and double social security coverage. They may cover employees as well as self-employed individuals.

In addition, social security agreements may “totalise” your periods of contributions or residence in Portugal and in your home country. This is particularly helpful if your home country expects you to contribute for a long time (e.g. you must have contributed for 40 years to avoid a pension rebate). Social security agreements are only needed for expats from outside the EEA or Switzerland.

 

EU coordination mechanism

Any cross-border movements within the EEA or Switzerland are subject to Regulation No 883/2004. This EU regime is merely designed to coordinate the social security systems across the EU, rather than to eliminate their differences.

If you have contributed to several mandatory pension schemes across the EU, each pension schemes will first compute the pension you are entitled to according to its own national rules. This, however, may be quite discriminatory. Consequently, EU law imposes some requirements on the country wherefrom you are going to claim your future pension. If you have worked there, this will be your country of residence. Otherwise, it should be the last country wherein you have worked.

That country will then need to compute your pension rights as if you had made all your European contributions into its own scheme. In practice, you should check these matters with the relevant social security scheme in order to avoid disappointment. Professional advice may possibly be needed.

The EU coordination mechanism is available for non-EU nationals moving within the EU.

 

International superannuation planning

Private superannuation schemes are generally tax-efficient products, no matter the country in which they are opened. Thus, they are heavily regulated in order to avoid undue tax base erosion. Double taxation is possible though.

As the Portuguese pension system is primarily based on social insurance, your concerns will normally be limited to your foreign pension rights only. Thus, you should check:

Your home country may have a tax treaty with Portugal to avoid double taxation on your foreign pensions. As a general rule, pension payouts are only taxable in your country of residence, but there are exceptions.

In Portugal, there are special tax concessions for those who can be viewed as “non-habitual residents” (Residentes não habituais). Nevertheless, cross-border superannuation planning is always on a case-by-case basis. It is strongly recommended to seek professional advice regarding this matter. Consulting with the social security authorities may be helpful as well.

 

 




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