The UK government has introduced several new measures in the most significant pension reform since 1921. Pension holders are now being granted a far wider range of access to their funds after retirement. How does this affect French residents from a tax point of view?
The UK government has introduced several new measures in the most significant pension reform since 1921. It decided that the existing pension regime perpetuated an unjust system for taxpayers who have “done the right thing” and saved all their lives. Pension holders are now being granted a far wider range of access to their funds after retirement.
Some reforms have already been introduced for Defined Contribution Scheme members, while others will start next April.
The following changes came into effect on 27th March 2014:
- A reduction in the minimum income requirement for accessing flexible drawdown from £20,000 to £12,000.
- An increase in the capped drawdown limit from 120% to 150% of equivalent annuity.
- An increase in the total pension wealth people can have before they are no longer entitled to receive lump sums under trivial commutation rules from £18,000 to £30,000.
- An increase to the small pension pots lump sum limit from £2,000 to £10,000, and the number of pots that can be taken as a lump sum increased to three.
The government is also consulting on another key change, to come into effect from 6th April 2015. If it goes ahead, members of defined contribution schemes will have much more flexibility in how they deal with their pension on retirement. The requirement to buy an annuity has already been removed and the 25% tax free lump sum will continue to be available, but retirees will have three choices for the balance of their pension:
- Withdraw their entire pension fund on retirement, with the withdrawal to be taxed at their marginal income tax rates, rather than 55% as is currently the case.
- Purchase an annuity.
- Flexible drawdown benefits over time.
Much can happen between now and April 2015. The proposed rules could change under consultation, and a new government could well revise the rules – the General Election is scheduled for May. So you need to keep close to an adviser who will keep you up to date on the news.
For all the reforms, it is very important for French residents to consider the local tax implications before you make any decisions.
Lump sums from UK pension funds are taxed at 7.5% in France, and where an entire pension fund is withdrawn under flexible drawdown, it is likely to be taxed in the same way. This compares very well to the 45% top rate of income tax in France, and there are no social charges if you are in possession of Form S1.
The same applies if you take your entire pension as a lump sum if the proposed new rules go ahead from next April. The UK/France double tax treaty gives taxing rights solely to France, so if taken as a lump sum while you are resident in France, the local tax is only 7.5%, representing a significant tax saving.
Besides income tax, you need to consider all of the tax implications of retaining the pension or extracting it in both France and the UK. Occupational pension funds are not subject to wealth tax in France, although the capitalised value of an annuity is. The cash you take from your pension fund would become exposed to French succession tax. This is a serious consideration, but with specialist advice you could invest tax efficiently for France and avoid or mitigate your succession tax liability.
The fact that you now have more options for your pension fund means that professional guidance is more important than ever before. You need to ensure that you take the right route for your personal objectives and circumstances, and make sure you do what will work best for you and your family in both the short and long-term.
UK pensions and pension transfers are heavily regulated in the UK by the UK Financial Conduct Authority (FCA). Even if you are no longer UK resident, it would be advisable to have an adviser who is FCA authorised and regulated, and is capable of carrying out the in-depth analysis of existing arrangements in order to advise you on your options going forward.
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.
Blevins Franks Financial Management Limited (BFFM) is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731. Where advice is provided outside the UK, via the Insurance Mediation Directive from Malta, the regulatory system differs in some respects from that of the UK. Blevins Franks Tax Limited provides taxation advice; its advisers are fully qualified tax specialists. This promotion has been approved and issued by BFFM.