What are the current options for different UK pensions in France and how can expatriates find the most tax-efficient and beneficial approach?
If you have chosen to retire to France, take care to explore your options to achieve a financially secure retirement – before the goalposts potentially change.
Today offers more freedom than ever for UK pensions. On the face of it, this is great news. Who doesn’t want choice when it comes to accessing benefits that have been locked away for years? But this is not an easy climate for expatriates wanting to secure a prosperous retirement in France. Not only is there ongoing Brexit uncertainty, increased longevity means we potentially need to cover the cost of spending decades in retirement. There are cross-border tax considerations too.
While Britons can access tax-efficient opportunities in France, understanding your options is the first step towards establishing the best approach for you.
What can’t you do with UK pensions in France?
There are two key restrictions to note. First, you cannot transfer out of UK public sector schemes, including those from the civil service, army, police and some NHS departments
Second, you cannot legitimately access your pension under the age of 55, unless it is under exceptional circumstances such as critical health. If you are offered opportunities to do otherwise, be extremely cautious. Not only could you risk losing everything to a pension scam, you could be in line for 55% UK tax penalties on transferred funds.
What can you do: ‘defined contribution’ UK pensions?
If you have a defined contribution (also known as ‘money purchase’) pension, you can take the entire fund as cash from age 55. This applies to personal or stakeholder pensions, many workplace pensions and Self-Invested Personal Pensions (SIPPs).
Other options include taking cash sums whenever you want or arranging a regular income through ‘flexible drawdown’. In these cases, the remaining funds would stay invested until your pot emptied. Alternatively, you could exchange your funds for an annuity that provides a regular income for life.
Expatriates living in France have the option of transferring UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS). Doing so can consolidate several UK pensions while unlocking various benefits.
Funds in a QROPS are sheltered from UK taxation on income and gains and protected from future changes to UK pension rules that may adversely affect expatriates – an increasing possibility after Brexit. Many QROPS also offer multi-currency flexibility, letting you hold and draw your funds in euros or sterling to minimise exchange rate risk. And, while most UK pensions are payable only to your spouse on death, a QROPS allows you to include additional heirs in your estate planning and potentially roll your wealth across generations.
What can you do: ‘defined benefit’ UK pensions?
If you have a defined benefit or ‘final salary’ employer pension, you can expect to receive a fixed proportion of salary – usually increasing each year with inflation – for the whole of retirement.
While you cannot usually withdraw cash from these pensions, if you have not yet started taking benefits you can transfer to a defined contribution scheme or a QROPS. Usually, the benefits of drawing a guaranteed income for life override the appeal of transferring. However, many providers – struggling to fund pension benefits amidst ultra-low interest rates and increased life expectancy – are offering members unusually large ‘transfer values’ to leave.
Traditionally, transfer values would represent 20x the annual salary due at retirement but, in some cases, current payments are reaching up to 40x. In an extreme example, if you had a final salary of £30,000 per year, you may have been offered £600,000 three years ago – but £1.2 million today. Carefully reinvested, even more modest sums could potentially provide a retirement income that exceeds the original annual payment.
Remember: transferring means forfeiting the right to draw a guaranteed income for as long as you live in retirement. For this reason, many members are better off staying where they are. An adviser can help you weigh up the advantages, disadvantages and long-term implications to establish what is right for you. While the UK Financial Conduct Authority makes it compulsory to take regulated financial advice before transferring benefits worth over £30,000 a year, this is sensible for anyone considering their final salary pension options.
Should you transfer a final salary pension? Six questions to help you decide
How will your UK pensions be taxed in France?
Generally, every time you withdraw cash from your UK pension, 25% will be tax-free in the UK. For British residents the remaining 75% is subject to the relevant UK income tax rate – 20%, 40% or 45% (or 19%-46% in Scotland) – as is any pension income.
The tax treatment is different if you are resident in France. Only UK government service pensions remain taxable in the UK (although the income is included when calculating the French tax due, with credit given by the French tax authorities for any tax paid in the UK). Meanwhile, other lump sums and pension income attract French taxes only. This remains the case even if funds remain in Britain (some exceptions apply in extreme circumstances).
In France, income earned in 2019 starts being taxed over €10,064 at 14%, dropping to a lower rate of 11% for 2020 income over €9,964. The middle income tax rates of 30% and 41% apply up to €157,806 (for 2019) and €156,244 (for 2020), after which the highest rate of 45% is charged. There is a capped 10% allowance on gross pension income.
Taking your UK pension as a lump sum can be highly tax-efficient in France – you could limit French tax to a fixed rate of just 7.5% with an unlimited 10% allowance. This may be possible if you have not already started drawing benefits from your pension and you take the entire fund in one go.
Pension income and lump sums are also subject to annual French social charges of 9.1%. However, social charges do not apply if you hold Form S1 (available at UK State Pension age) or are not registered for French healthcare. If you are under UK retirement age and considering taking a pension lump sum, you could therefore save unnecessary social charges by taking private medical insurance instead of joining the French healthcare system.
QROPS income is taxed in the same way as UK pension income. Transferring UK pensions to a QROPS is currently tax-free if both you and the QROPS are based in the EU/EEA (European Economic Area). Otherwise, the UK government charges
Transferring UK pensions to a QROPS based in the EU or EEA (European Economic Area) is tax-free, but a 25% ‘overseas transfer charge’. Once the UK sheds its EU commitments, it is possible this could be extended to include EU/EEA transfers post-Brexit.
What should you do with UK pensions in France?
What is right for you will depend on your unique circumstances and goals. While many expatriates in France benefit from transferring UK pensions to a QROPS, for instance, this will not suit everyone.
Others find it more beneficial to reinvest UK pension funds into an alternative structure, such as an assurance-vie, which can offer better tax-efficiency and similar flexibility and estate planning advantages. In any case, the benefits of both an assurance-vie or QROPS can vary greatly between providers, so take specialist, personalised advice to navigate the options.
You may prefer to do nothing and leave your UK pensions where they are, but remember that UK pension payments are usually paid in sterling. If you live in France and your spending is in euros, conversion fees and variable exchange rates could significantly reduce the value of your pension income.
Discuss your options with a professional adviser who is regulated by the UK Financial Conduct Authority (FCA) to ensure the best outcome for you. They should also have cross-border experience to take the French and UK tax implications into account.
See six tips for securing quality pension advice
Behavioural economists sometimes refer to ‘choice overload’: when confronted with too many options, we often take no action at all for fear of getting it wrong. While it is better to do nothing than do the wrong thing with your pension, with Brexit still looming, the window may be closing to take advantage of today’s opportunities. Take time now to review your options to make the most of your pensions and secure your long-term financial security in France.
Contact a France-based Blevins Franks adviser
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; individuals should seek personalised advice.