Retirement in Portugal: Cost of living, real estate and new tax reforms

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Cheap accommodation, warm climate, and top-notch golf courses?

Retiring in Portugal has many advantages. Add to that the tax deduction on pension income for 10 years, as was the case with the generous Non-Habitual Residence (NHR) tax scheme, and it becomes clear why it has been a magnet for retirees in recent years.

However, this "golden visa" scheme will now be closed.

Therefore, if you are counting on a cheaper retirement in the sun, you will need to crunch the numbers and get professional tax advice to ensure that retiring there is still worth it.

Why Portugal?

For Irish retirees tired of long Irish winters and unpredictable summer seasons, Portugal's ace in the hole is the weather. The Algarve region in the south is especially popular - its dry and sunny microclimate means that winter temperatures rarely drop below 16 degrees.

It's no wonder that an estimated 15,000 Irish people live in Portugal. In fact, Irish and British buyers accounted for 71 percent of all real estate sales in the Algarve in 2022, according to a report by Quinta Properties.

Residential complex Vilamoura Lakes

It consists of two and three-bedroom apartments with large balconies and barbecues overlooking the pool and garden. There are also regular flights from Ireland to Faro, especially with increased schedules in the summer. While it would be polite to learn a few words in Portuguese, most people speak English well.

Medical care

Irish citizens have the same rights as Portuguese citizens, so you can expect a similar level of care, says Christina Hippisley, General Manager of the Portuguese Chamber of Commerce.

There is also the option to take out private health insurance to access the large network of private hospitals that have opened in the country. "Even if you decide to pay for your dental treatment instead of using the Portuguese healthcare system, the prices will be significantly lower due to lower labor costs," says Hippisley.

Saving money

Moving to a country with a lower cost of living can help save retirement capital, and the cost of living in Portugal is significantly lower than in Ireland, says Hippisley. Coffee, restaurant meals, pub visits, and hotel stays are 29 percent below the EU average, according to Eurostat data. On the other hand, Ireland is 30 percent above the EU average.

You will also save even more by dining at home. Grocery prices in Portugal are lower than the EU average. In Ireland, on the other hand, the cost of groceries is 17 percent higher than the average.

When it comes to renting and maintaining a house, expenses for water, gas, electricity, and repairs account for almost 20 percent of the average in the EU. In Ireland, those same costs are 92 percent higher than the average, according to Eurostat.

“It’s definitely more affordable, but you have to follow local routines,” says Hippisley. “You don’t spend every evening at a Michelin-starred restaurant, but the value for money in everyday life is really good.” Visit local markets for the best prices.

Tax-free pension

In recent years, the NHR tax scheme in Portugal has been a huge advantage for many Irish retirees. Residents of countries with double tax agreements with Portugal, including Ireland, could apply for this scheme as long as they moved there and had an interest in real estate. However, you were not required to buy property; renting was sufficient.

Thanks to this scheme, you could effectively live tax-free on your pension income, saving yourself a significant amount.

After 10 years, you will start paying tax at Portugal's marginal rates.

However, while the Portuguese tax system provides for a tax deduction for 10 years, the Irish tax authority must also approve this income, leaving the state without taxes.

Marta de Assis Rodriguez (~ likely Taxwise, but it was not specified)

It adds: "To take advantage of it, you need to have a preliminary contract for the purchase or rental of real estate in Portugal, dated 2023."

A preliminary contract for the purchase or rental of real estate in Portugal does not necessarily need to be registered with a notary in Portugal, so it is not entirely clear how the authorities will be able to confirm the specific date of your intention to move.

Politically, everything is still in a state of transition.

“Elections are currently taking place in Portugal. Depending on which party wins, this measure may or may not be canceled,” says de Assis Rodrigues. “They might bring it back, possibly under a different name.”

If you miss the opportunity to take advantage of the NHR scheme but still want to retire in Portugal, find out how you will be taxed if you live there.

“Ireland has a double taxation agreement with Portugal, which means that your pension may only be taxed in the place where you reside. Therefore, if you move to Portugal, it will be Portugal that will be entitled to tax your pension, unless it is a state pension,” says de Assis Rodrigues.

As for residency, you are considered a tax resident of Ireland if you are present here for 183 days or more during the tax year, or 280 days or more in total, including the current tax year and the previous tax year.

Your income will be taxed at the corresponding progressive rate in Portugal until another similar scheme is approved, says de Assis Rodrigues.

Progressive tax rates in Portugal start at 14 percent and can reach up to 53 percent, she says. "It's definitely not as attractive when taxes have very low starting rates," Ren says.

“Tax rates are low because income in Portugal is so low - an average person with a reasonable annual income can pay almost 48 percent in taxes if their pension is substantial.” For example, residents with an income of 78,835 euros and above will pay tax at a rate of 48 percent.

“Sometimes, depending on the person, you can be a double tax resident in two countries at the same time, because it may turn out that you would pay more in Portugal than you would in Ireland,” says Ren.

“We will review your pension, where it comes from - whether it’s a stakeholder pension, a personal pension, a pension based on certain conditions or contributions - and we will look at how they have been accumulated, as well as your age and when you will start receiving payments. The discussion will differ if you are 55 or 65 years old,” she says.

If you receive a state pension in Ireland, in general, it is taxed in Ireland regardless of your residency status, according to the Revenue office.

The Approved Retirement Fund (ARF) and Personal Retirement Savings Account (PRSA) are post-retirement investment funds. If you withdraw money from either of them, you will be taxed on the spot, regardless of your residency status, says Revenue.

This is because withdrawals from such structures are not considered pension payments.

However, despite the changes in tax regulations, developers still see significant interest from potential Irish buyers, and some have been holding exhibitions here recently.

Last month, the branded property Wyndham Grand Algarve in Quinta do Lago held negotiations in Cork and Dublin, offering properties in the resort with a 7 percent profit. Additionally, the Moving to Portugal exhibition, supported by the Ireland Portugal Business Network (IPBN), is returning to Dublin after a five-year break on April 18. It will showcase new real estate in the region and explain the legal, tax, and financial aspects of moving to Portugal.

Anyone looking to buy such property should do their homework.

A real estate buyer in Portugal will pay a property transfer tax ranging from 1 to 8 percent, depending on the price, location, and whether it is their first or second home in Portugal. The property purchase tax is calculated at a rate of 0.8 percent of the purchase price. There is also an annual property tax that varies by region.

"In Quinta do Lago, it is 0.3 percent of the rental value of the property, so it is quite low compared to other countries," says de Assis Rodrigues.

If you rent out property, the income will be taxed in Portugal, regardless of whether you are a resident or not. "Rental income is taxed at a rate of 28 percent," says de Assis Rodrigues.

If the property is held within a company structure, the rental income tax is 25 percent, she says.

“The way a person structures their investments depends on their investment goals - whether they want to establish their residency in Portugal or not.”

You pay a tax on the profit from the sale of real estate, but only half of the profit is taken into account. The tax is levied at a progressive rate and will consider your other sources of income, says de Assis Rodriguez.

“When you rent out property in Portugal, it transitions from your personal name to a business activity, and this changes how the capital gains tax is applied if you sell it,” says Wren. “The capital gains tax will be higher than for personal use.”