How to retire in Portugal - and pay just 10 % taxes

Portugal is the perfect place in Europe for retirees looking for sunshine and wanting to minimize taxes. However, it hasn't always been the most popular choice. In May 2020, there were just 11,000 British pensioners living in Portugal, while more than 106,000 retirees have moved to Spain, according to the UK Department of Social Security.

The sunny Iberian country is offering generous tax breaks for British pensioners, cutting pension taxes by more than half. On the medical front, all legal residents have access to government subsidized health care, similar to the UK. Foreigners have the same coverage as locals.

But there are a number of requirements to familiarize yourself with before you are allowed to move to Portugal. In this article Telegraph Money explains everything you need to know about moving to Portugal: taxes, visas, pensions and property prices.

How much money you need to move to Portugal to retire.

In most European Union countries, non-EU foreigners must provide evidence that they are able to maintain a certain level of income if they would move there. Pensioners usually need to show that a combination of savings accounts, personal pensions, state pension, dividends and rental income meet the minimum requirements.

Portugal is no exception, but the threshold here is much lower compared to neighboring countries. British pensioners must reach the Portuguese minimum wage, which is €760 a month in 2023. An older person coming from abroad only needs to have an annual income or savings of €9,120 (press £7,930), or €13,680 (£11,895) for a couple, for each year of residence in the country.

When they obtain a visa from the Portuguese consulate in the UK, they have four months to turn it into a two-year temporary residence permit, followed by a further three-year permit. After five years, they can apply for a permanent residence permit and even obtain a Portuguese passport. Jason Porter of financial adviser Blevins Franks added: "The current full new UK state pension costs £10,600 a year, which exceeds the requirements of the D7 Passive Income Visa for a single person as well as a couple if both have state pensions. "

Gaining the right to move: visa processing

After Brexit, anyone planning to move to the EU must apply for a long-stay visa if they plan to spend more than 90 days in a European Union country. For Portugal, you need to get a local tax number, known as a Portuguese NIF number, and open a bank account in advance - although you may already have one if you've bought property in Portugal.

There are two types of visa that pensioners can apply for. The first is called D7 Passive Income and can be filed at the nearest Portuguese embassy or consulate. This costs €90 and is valid for four months, during which time the applicant must replace it with a two-year temporary residence permit at a cost of €160.

This visa requires proof of residence - either a signed lease or proof of purchase of a property, as well as proof of sufficient cash to support themselves. You will also need proof of private health insurance - unless you have an S1 from the UK confirming that the National Health Service will cover medical expenses in Portugal.

Private health insurance can be waived either on receipt of an S1 or after you have received confirmation of access to the Portuguese national health system, which is usually after you have been granted a temporary residence permit for two years.

The second type of visa, the Golden Visa, is more expensive but allows flexible residency rights in exchange for large investments in local real estate or the economy. However, the most common route - buying one or more properties worth €500,000 or more - is in the process of being discontinued. While other investment options for this visa are likely to remain, experts believe they will offer to support Portuguese businesses, which may be less popular.

Everything you need to know about Portugal's tax rules

Portugal offers some of the most attractive tax rules for foreign retirees. When moving, they can apply for extraordinary resident (NHR) status, which provides certain tax benefits. Pension income is only subject to a flat tax rate of 10% if it comes from abroad. In most cases, pension income is taxed in the pensioner's country of residence, so in this case it is in Portugal, not the UK. The only exception is civil service pensions, which always remain taxable in the UK, no matter where you live.

This means that UK pensioners who move to Portugal and qualify for extraordinary residence will pay significantly less tax than if they stayed in the UK. For example, a person with a state pension and other income who uses all their personal allowances will pay tax at 20% on £30,000 of annual pension income. If he moved to Portugal, however, this tax will be only 10%. The savings are much greater for higher-income taxpayers, who will see their bills cut by a quarter.

Any new resident - a person who has not lived in Portugal for the last five years - can be granted extraordinary resident status for 10 years. Jason Porter said: "Portugal has a very attractive tax system for retirees. The 10-year NHR tax rules mean that UK citizens pay just 10% tax on their pension income and no tax at all on dividends relative to foreign countries. There are also interesting tax benefits for other savings and investment structures, making the last 10-year NHR period in Portugal very favorable from a tax perspective. "

Buying real estate in Portugal

The average cost of property in Portugal was much lower than in the UK, but prices can be high in popular tourist destinations. The most expensive property is in the Lisbon area and costs €3,081 per square meter on average for the year to March 2021. While properties in Lagoa in the Algarve cost €1,361 per square meter on average.

This article was first published on July 23, 2023 and has since been updated.