It’s a time of change for UK pensions. They will soon become liable to UK inheritance tax, and transfers to QROPS now incur a tax charge. It is time to explore the options for your pension funds, whether you still live in the UK or are enjoying retirement in France.
Pensions can be our most important asset once we retire. They fund our living expenses and need to maintain our standard of living for as long necessary. Looking beyond that, you may wish to ensure any residual funds will benefit your family and heirs. We therefore need to understand all the factors that may impact our pension savings, including taxation.
British expatriates in France have to work around two different tax regimes, keeping up to date on relevant changes in both countries. Currently the UK reforms are causing most concern. If you just have a holiday home in France and did not plan on becoming resident, are you now wondering whether you’ll be better off leaving the UK?
The changes announced in the UK 2024 Autumn Budget have a massive impact:
- Making UK pension funds liable to UK inheritance tax affects families across the country, as well as British expatriates.
- Extending the 25% overseas transfer charge to most EU Qualifying Recognised Overseas Pensions Schemes (QROPS) effectively curtailed what had been a useful option for expatriates.
Defined benefit vs defined contribution pension schemes
With ‘defined benefits’ or ‘final salary’ pensions, the accrual of benefits is based on the number of years you worked for the company and your final salary. They are becoming rarer these days, especially for private companies. Under certain circumstances, these can be transferred and a cash value given for basically giving up your guaranteed pension, but this has become much less common. The likelihood is that you will not be able to cash yours in, which is not necessarily a bad thing as they provide good benefits and peace of mind.
These days employers often favour ‘defined contribution’ or ‘money purchase’ pensions, such as SIPPs. You and/or your employer pay into the scheme, and the funds can be invested and accumulate tax free. This is a much more flexible pension. Options can include leaving the money invested in the UK pension and taking income drawdown or ad hoc withdrawals, buying an annuity, and transferring the pension and cashing it in one go – if you live in France, you can reinvest the funds into arrangements that are highly tax efficient there.
QROPS UK tax charge
With immediate effect from 30 October 2024, most transfers from UK to overseas pensions suffer a 25% tax charge. The Overseas Transfer Charge was already in place for non-EU transfers, but it now also applies to transfers to EU QROPS, unless you reside in the same country as the QROPS (with Malta and Gibraltar being the only two options for British retirees).
QROPS can provide various benefits, and this option remains available to British expatriates in France who are prepared to pay the 25% charge. While it sounds prohibitive, it can still be the right decision for some people when they weigh this tax against the liabilities they and their beneficiaries will face if you leave the pension in the UK.
Pensions and UK inheritance tax
In a seismic change for UK pensions, funds will start to be liable for UK inheritance tax (IHT) from April 2027. Although UK nationals residing long-term in France are subject to French succession tax rather than UK inheritance tax on worldwide assets, assets situated in the UK are always assessed for IHT, with a credit given in France for any IHT paid in the UK. Once your pensions funds form part of your UK estate, you are much more likely to breach the nil rate band and your heirs will pay 40% IHT.
Remember, if you die over age 75 and your pension passes to UK resident beneficiaries, they could additionally pay income tax of up to 45% on the residual funds. HM Revenue & Customs could do quite well from your pension savings.
Time for a pension holiday?
Some UK residents with substantial pension pots, worried about their beneficiaries’ tax liabilities and enticed by the prospect of living abroad, are contemplating leaving the UK to improve their tax situation. It does not have to be a permanent move, provided it covers at a least five UK tax years.
While France offers some tax benefits, if you are flexible on where you live and don’t mind moving more than once, you could consider taking up residence in Malta initially. You can then move your pension into a Malta QROPS without the 25% overseas transfer charge.
Once five UK tax years of Malta residence pass after the transfer, you can then move to France and benefit from its tax regime to cash the pension in. You may be happy to continue enjoying your retirement years in France, as so many people do, but if you wish to return to UK you can do so after five years without tax consequences (it understandably has anti-avoidance rules in place).
Taking a ‘pension holiday’ is a big commitment that involves strategic planning and full understanding of each country’s tax regime. It won’t be suitable for most people, but for those with very large pensions, the inclination to live abroad and time on their side, it could be an interesting option.
France tax benefits
Most UK pension income (excluding government service pensions) received by French residents is only taxed in France. While it is subject to 9.1% social charges as well as income tax, you are exempt from social charges if you hold Form S1. You receive a 10% deduction for income tax (up to a maximum).
Pension lump sums are fully taxed as pension income in France. However, if you take your entire pension as one lump sum, in certain circumstances you may be eligible for a beneficial fixed 7.5% income tax rate.
Beware, however, that France imposes an additional 3% or 4% tax on high revenue, which kicks in when annual income surpasses €250,000 and €500,000 for an individual, €500,000 and €1,000,000 for a couple. The 2025 budget introduced a further charge to ensure these higher income households pay a minimum of 20% income tax. However, taper relief applies where income is below €330,000 (€660,000 for couples). This new contribution différentielle is only intended to apply for 2025, but temporary taxes have a habit of outstaying their welcome.
And the really interesting thing for pension encashment is that if the income cannot be received annually, and the amount exceeds the taxpayer’s net income in the past three years, only one quarter of that exceptional income is taken into account. This means that a married couple could potentially encash a pension worth around €2 million without paying this new contribution.
Which pension option is best for you?
There is no one size fits all solution, and you shouldn’t just focus on tax. Your decision should be based on numerous factors, including your current circumstances, future plans, objectives, how much is in the pension, your other savings and assets, where you want to live, who you want to leave the money to, your risk tolerance and, of course, tax.
This may be one of the most important financial decisions you make, so take your time to fully explore your options. Pensions is a highly complex area, with potential pitfalls, more so when you have cross-border considerations, so specialist professional advice is essential.
Blevins Franks offers a range of solutions to suit UK nationals wherever you live. Whether you’re UK resident and not planning on leaving, or you’re considering moving abroad, or you’re already an expatriate enjoying life in France or elsewhere, or you’re planning to return to UK, we can help you make the right choice for your pensions and retirement savings. Our integrated strategic financial plans cover pensions, taxation, estate planning and investment, and are highly personalised for each client.
Get in touch with us today.
