Your pension funds play an important role in your financial security in retirement. You need to explore all your options, looking at the UK pension freedom, the tax implications in France and the underlying investments. Also consider how Brexit may affect your pension planning.
Your pension funds play an important role in your financial security in retirement. You need to explore all your options, looking at the UK pension freedom, the tax implications in France , the underlying investments and currency options. Also consider how Brexit may affect your pension planning.
If you have chosen to spend your retirement years in France, your pension funds will play an important role in your financial security and lifestyle. It really is important to spend a little time exploring all your options, and the implications for a French resident, to determine what will work best for you. You want to protect the savings it took so many years to build up, and see how you can make the most of them.
Pension freedom options
If you have a defined contribution (money purchase) scheme, your options include –
- Take regular income through income drawdown
- Take a series of lump sums without having to enter into a drawdown policy
- Cash in your entire pension fund/s
- Buy an annuity
Not all scheme types allow these choices so it is important to investigate in depth.
The freedom to withdraw as much of your fund as you wish does not apply to defined benefit (final salary) schemes. You may be able to transfer to a defined contribution scheme or Qualifying Recognised Overseas Pension Scheme (QROPS), but take advice as this would mean losing valuable benefits. Under Financial Conduct Authority rules, transfers over £30,000 must have advice from a regulated pension transfer specialist.
Taxation in France
When reviewing your options you need to understand all the tax implications, particularly for larger funds.
In the UK, pension income above the personal allowance is taxed at the income tax rates of 20%, 40% (income over £32,000) or 45% (income over £150,000. The £11,000 personal allowance reduces for income over £100,000, falling to zero for income over £122,000.
As with the previous rules, 25% of pension lump sums are tax free.
French residents are taxed in France rather than the UK (with the exception of government service, civil and military pensions).
Pension income is taxed at the progressive scale rates of tax, from 0% for income under €9,700 to 45% for income over €152,108. There is a 10% deduction (maximum of €3,711).
Where it becomes more interesting is the taxation of pension lump sums. They are fully taxable for French residents, but can be charged at a fixed rate of just 7.5%. In most cases this only applies if you take the full funds at once; otherwise it is taxed as income. If you have not yet drawn benefits from your personal or non-governmental pension you could potentially withdraw your whole fund for just 7.5% tax.
As always in France, social charges are also payable, at the rate of 7.4% for pensions. You escape this if you are not affiliated to the French health system (this is generally the case if you hold Form S1). Even with social charges, 14.9% tax is still an attractive rate compared to the higher rates of income tax.
So depending on your circumstances, you could withdraw your pension savings for relatively little tax and reinvest them in a tax-efficient assurance vie to achieve long-term tax and estate planning benefits. This would need very careful consideration, and make sure you invest in the right assurance vie, so take specialist advice.
You will need a solution that has a multi-currency option where you:
- Can invest in one currency and keep it invested there for the time being, thereby avoiding potentially damaging exchange rates.
- Have the ability to withdraw only the income you need in the currency you require it.
- Have the ability to move the entire fund into your new home currency at a later date when the exchange rate improves.
How you manage the underlying investments in your pension funds is a key part of protecting your retirement savings. Whether you have a SIPP, QROPS, or withdraw the funds to invest in an assurance vie, the funds need to be well managed.
Even if you leave your pensions as they are, and for many this is right decision, this is a good time to review the investments and consider if they are suitable for you. Are they designed around your risk profile and objectives? Are they more appropriate for a UK resident than a French resident? Do you need more diversification away from UK assets? Can you protect yourself from exchange rate movements, particularly considering how Sterling is reacting to Brexit?
In theory the UK pension freedom is a matter of UK law and whether or not the UK is an EU Member State is irrelevant. However pension freedom could be under threat for final salary savers. Deficits have risen to record highs after the fall in the price of UK gilts following the referendum. The Work and Pensions Select Committee is exploring ways to contain the problem. This could potentially lead to the government suspending savers’ ability to transfer funds to prevent mass transfers before any new legislation.
Gilts are used to underpin the capital required to secure a pension scheme. The lower the yield, the more capital a scheme needs to secure a given level of income. Last time ten-year gilt yields were this low Queen Victoria was on the throne! This could translate to higher transfer values for scheme members.
If a final salary scheme is unable to meet its liabilities, the Pension Protection Fund provides compensation of 90% of members’ rights, capped at £33,678 per annum at age 65.
If you have yet to crystalise a final salary scheme, now seems an opportune time to review the advantages and disadvantages of transferring. You may wish to take steps now or draw up a plan of action with an adviser.
The key aim of pension planning is to ensure you will be financially secure for rest of your life. There are many factors to take into account and it essential to explore all your options to establish which works best for you. Blevins Franks has UK pension, investment and French tax specialists so wecan provide a holistic solution and service.
Any questions? Ask our financial advisers for help.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.