Your wealth management structures should be designed around your personal circumstances and objectives. This includes your investments, tax planning and pension funds. When your circumstances change you need to review and amend your arrangements accordingly, and both moving to France and retirement are significant life changes.
The most important rule for financial planning and protecting your wealth is that all your wealth management structures should be designed around your personal circumstances and objectives. This includes your investments, tax planning and pension funds. When your circumstances change you need to review and amend your arrangements accordingly.
Both moving to France from the UK and retirement are significant life changes. On top of this you have a new tax regime to get to grips with – and a very complex, frequently changing one at that! A key part of protecting your wealth is making sure that neither you nor your heirs pay any more tax than necessary. So you need to consider the most tax efficient way of holding your assets in France.
Taxation of pensions in France
- Income from pensions derived from professional activities, and generally from private pensions, are taxed the same way as salaries. You therefore pay tax at the income tax scale rates, currently up to 45%. The Parts system applies as with other income, and private pensions receive a 10% deduction (maximum €3,660).
- Most UK government and local government service pensions remain taxable in the UK. They are not taxed in France, but the income is taken into account when determining your income tax rate in France, and so can increase your tax bill.
- Genuine annuities receive discounts of between 30% and 70%, depending on your age.
- Lump sums from UK pension funds are taxable in France at a flat rate of 7.5%.
- All pension income is additionally subject to 7.1% social charges, but if you hold EU Form S1 your pension income is exempt.
Options for your UK pensions
Pensions are an important part of your retirement planning. This is a complex area for British expatriates, with rules frequently changing. Great care should be taken to assess the options available before transferring your fund or starting to draw your pension.
The options for British expatriates include remaining in your current scheme; income drawdown or flexible drawdown plans; Self Invested Personal Pensions (SIPPs); Qualifying Recognised Overseas Pension Schemes (QROPS) and buying an annuity. You should establish how each will work for you, the pros and cons, tax implications, whether you can pass the balance on to your chosen beneficiaries etc. The selection of the correction option is a minefield for the unwary – the wrong choice could adversely affect you and your widow for life.
The new pension legislation in 2011 brought about some significant reforms. One particularly interesting change was to split “Drawdown Pensions” into “Capped Drawdown” and “Flexible Drawdown”.
With capped you can choose the frequency and amount of income, and alter it as necessary, but HM Revenue & Customs imposes a cap on how much you can take each year.
Flexible drawdown was a radical change, and can provide attractive opportunities for those who are eligible. There is no limit to the amount of income that can be drawn each year; you can even take your entire fund out in one go.
To opt for flexible drawdown you must meet the Minimum Income Requirement (MIR) and other requirements.
To meet the MIR you must have a secure pension income of at least £20,000 in payment (in your own right or as a dependant) in that tax year. This can be a combination of state pension, lifetime annuities, registered pension schemes (with certain conditions), secure payments from overseas pension schemes and top up payments from the Financial Assistance Scheme. Income drawdown, pension income from other sources, and QROPS and QNUPS do not count towards the MIR.
Flexible Drawdown can be an interesting option for those who: require income flexibility; want to delay taking an annuity; wish to maintain control of the investment strategy; want to pass the funds to their heirs; need flexibility over income levels to protect against exchange rate fluctuations, and are in a position to accept some degree of risk in order to build a potentially bigger fund.
The opportunity to take up 100% of your fund out at once can be particularly interesting option. It would enable you to take the funds and reinvest them inside other arrangements that are more advantageous for you here in France.
When you take a single lump sum out under flexible drawdown, it is taxable in France if you are resident here, and likely to be taxed as a lump sum. Many would consider 7.5% a relatively low amount for the benefits you may be able to achieve elsewhere. You will also escape the social charges if you have Form S1.
For example, you could consider transferring the funds into an Assurance Vie. These policies offer significant tax benefits in France, especially the longer you hold them. A wide range of investments can be held within an Assurance Vie, giving you flexibility and choice.
Not all Assurance Vie are the same, however, so it is important to ensure the one you choose provides the most advantages and suits your aims, needs and circumstances.
Many people have collected various pension funds over their working life, such as Personal Pensions, Company Pension Schemes and AVCs (Additional Voluntary Contributions). You may be able to put these to better use now too, so make sure you review all of your pensions at the same time to reach the best overall solution for you. You could make life a lot simpler and more cost effective by consolidating various plans into one arrangement.
Opting for flexible drawdown needs careful consideration. You should be armed with all the facts, understand the implications and weigh up all your options before making a decision. Expert advice is essential, because you need to ensure from the outset that you select the best option for you. Likewise with tax planning so complex and ever changing in France, specialist advice is an absolute necessity. Whether it is pensions, tax planning or investments, to protect yourself, advice should be taken in writing from a specialist professional.
20 January 2014
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.