Here we are, at the start of the new year, wondering what it will bring. The last few years have certainly been eventful and challenging, so a calmer year would be a welcome change.
There are always some changes of course, but what can we expect from a personal financial planning point of view for France?
French tax 2024
Long-term residents of France will know that the local tax rules can change frequently and substantially. We have, however, been in a tax lull for a few years now. President Macron introduced some significant and welcome reforms when he first took office, but it has been quiet since then.
The 2024 finance bill didn’t include any notable tax developments. The income tax bands have been adjusted for inflation as usual, so you can earn a little more before hitting the next tax bracket.
You can now earn up to €11,294 before you start paying income tax, up from last year’s €10,777. The top 45% is now applied to income over €177,106 (previously €168,994).
Social charges are the same as in 2023: 9.7% for employment income; 9.1% for pension income and 17.2% for investment income. Retirees with Form S1 escape social charges on pensions and pay a lower 7.5% rate on investment income. A reduced rate of 7.4% may apply to low pension income.
The flat rate tax on investment income remains at 30%, or 20.3% if you have Form S1.
President Macron has talked about increasing some of the succession tax allowances, such as aligning them for stepchildren, which would be good news for many, but that is not scheduled for 2024.
French succession law issue
France imposes a forced heirship regime that protects children over spouses. Since 2015, the EU succession regulation allows foreign nationals living in France to opt for the succession law of their country of nationality to apply on their death, instead of the local regime.
In 2021 France introduced a law that contradicts the EU legislation. If assets pass under the provision of a country with no forced heirship rules – such as the UK – protected heirs (i.e. your children, even if estranged) can claim compensation for the assets located in France which they would have inherited under French law.
As reported in Connexion newspaper, the European Commission has received multiple complaints about this violation of EU law. Hopefully, the Commission will soon open an infringement procedure against France, but even if it rules against France, it may take years for anything to be done about it.
UK pensions – new limits imposed on tax-free lump sums
The only constant aspect UK pensions is that they are always complex – and here we have a perfect example of this. No sooner has one unpopular allowance been removed than new ones are introduced.
The pensions Lifetime Allowance has now been fully abolished, but in its place we have the Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA). These come into effect in just a couple of months, on 6th April 2024.
The UK Finance Bill published at the end of November confirmed that the Lump Sum Allowance will be set at £268,275 and apply to lump sums received in your lifetime. This covers pension commencement, uncrystallised funds, trivial commutation, and winding-up lump sums. The LSDBA will be £1,073,100 and apply to lump sums and benefits paid on death, even if you die before age 75. When a lump sum is paid above these limits, the excess is taxed at the recipient’s marginal rate of income tax.
A further Overseas Transfer Allowance (OTA) will restrict the exclusions from the overseas transfer charge on transfers from a UK registered pension into an overseas pension scheme, such as a QROPS, to £1,073,100. Amounts in excess of the available Overseas Transfer Allowance suffer the 25% Overseas Transfer Charge. When calculating how much of the OTA is available, previous overseas transfers are taken into account, so the amount available before the 25% charge applies could be less than the headline allowance.
It will be interesting to see what happens if there is a change of government in the UK. When the Lifetime Allowance was abolished last March, the Labour Party quickly pledged to reinstate it. The next elections must be held within the next 12 months and, with the polls looking encouraging for the Opposition, there may be a limited opportunity to transfer your pension out of the UK without this charge.
Financial planning for France – Inflation forecast
There has been no escaping inflation over the last couple of years, with all of us hit by the high cost of living.
French inflation, as measured by the Harmonised Index of Consumer Prices (HICP), peaked at 7.3% in February 2023. As at September 2023, the Banque de France expected the average annual inflation for 2023 to be 5.8%, virtually the same as 2022’s 5.9%.
For 2024, the central bank anticipates that all components of inflation will fall (assuming commodity prices ease as expected), reaching 2.2% by the last quarter. On an average annual basis, it forecasts 2.6% inflation for 2024 as a whole, then 1.8% in 2025.
While we all be relieved when inflation levels return to normal, we should not become complacent about the inflation risk and how the rising cost of living affects us over time, particularly if you are retired. As a basic illustration, if you have €50,000 in a current account with no growth, and inflation is 3% every year, after 10 years its value will have fallen to around €37,000. After 20 years it’s around €27,500 and after 30 just €20,555. That’s a 59% reduction in purchasing power.
Unless your savings grow each year, they will buy you considerably less as the years go by. It is advisable to invest in assets that are usually expected to produce enough growth to at least keep up with inflation over the medium to long term. Reduce investment risk to more comfortable levels by calculating your attitude to risk, then building a suitable well-diversified portfolio around your risk tolerance, circumstances and objectives.
Financial planning for a secure future in France
One lesson we’ve learned over recent years is that we can never know what is around the corner. Many things happen that we have no control over, which perhaps makes it all the more important to take control where we can.
Start by keeping informed on all the tax, inheritance and pension reforms that impact you and your family, considering what steps you can take to protect yourself if necessary. Ensure your investment portfolio is specifically designed around your circumstances, objectives and risk tolerance and has enough diversification. If you haven’t yet established an estate plan based around the French succession regime, don’t put it off any longer. Once you’ve done all that, review your wealth management annually to ensure it is up to date and on track.
Blevins Franks advisers live locally and have a deep understanding of the French financial system. They can evaluate your financial plan based on your specific circumstances to ensure you and your family have peace of mind for a secure future.
Contact us today.