We are now in the new age of UK pensions, where you have complete freedom to do whatever you wish with your funds… depending on what type of pension you have, that is. You also need to consider the impact of local taxation in France.
We are now in the new age of UK pensions, where you have complete freedom to do whatever you wish with your funds… depending on what type of pension you have, that is.
While the new pension regime is generally welcome, there are a few caveats. It is more complex than many realise, with various myths about what you can and cannot do. You need to understand the tax implications in France. And there is a concern that people will make the wrong decision, because they have not weighed up all their options, or they have been encouraged to transfer into a scheme that is unsuitable for them, and possibly high risk or bogus.
Do not rush into anything, and be very circumspect about what you do with your funds – you may need them to provide financial security and income for the rest of your life.
What can and can’t you do?
If you have a defined contribution scheme (also known as money purchase schemes, such as personal or stakeholder pensions, Self-Invested Personal Pensions (SIPPs), Executive Pension Plans etc.) you can withdraw the whole amount in one go. Or you could take withdrawals of any amount whenever you wish, or take a regular income with a drawdown plan. You can also still buy an annuity. This is, if your pension provider applies the new rules; some may choose not to, or not be ready yet.
You cannot withdraw as much cash as you like if you have a defined benefit scheme (e.g. a final salary scheme).
You can transfer your defined benefit scheme to a defined contribution scheme, but only if you have taken advice from a Financial Conduct Authority regulated pension transfer specialist with the requisite qualifications and permissions.
You could lose valuable pension benefits if you transfer out of defined benefit scheme, so this needs careful consideration. Make sure you understand the consequences.
You cannot generally transfer out of public sector schemes, such as civil service and NHS pensions, or unfunded schemes (i.e. where the employer does not pay into the scheme on an ongoing basis, but makes a promise to pay benefits when you retire).
You cannot access your pension savings if you are younger than 55.
You can nominate anyone as a beneficiary. The 55% death tax has been abolished, but if you die over age 75 your beneficiaries will still pay tax, at their marginal rate on income or at 45% on lump sums (this may change to income tax rates from April 2016). This also applies to annuities, but not final salary schemes.
If you have an annuity, from April 2016 the restrictions on buying and selling existing annuities will be removed. You will be able to take capital as a lump sum or place in drawdown to use the proceeds more gradually.
If you have a QROPS (Qualifying Recognised Overseas Pension Scheme), you may not yet have the freedom to withdraw all the funds. HM Revenue & Customs announced in March that the rule where 70% of the funds transferred should provide an income for life will remain in place “temporarily” for non EU schemes (the 70% rule does not apply to EU schemes). It did not indicate for how long.
There are also myths surrounding taxation.
In the UK, pension income is taxed at the income tax rates of 20%, 40% or 45%. You can take 25% tax free. If you withdraw the whole amount as a lump sum, 75% of it is taxed as income. If you take ad hoc lump sums, 25% of each is tax free and the rest is taxable.
In France, state retirement pensions, pensions derived from professional activities and private pensions are taxed at the income scale rates of tax up to 45%. Most government service pensions remain taxable in the UK.
Lump sums from UK pensions are taxed at a fixed 7.5%, provided there is no possibility of taking another lump sum in future. So if you take your entire UK pension at once as a lump sum, it will be taxable at 7.5%; otherwise it will be taxed as income.
Pension income is additionally subject to 7.4% social charges, unless you have EU Form S1 or do not yet have access to the French health system.
So it may be possible to withdraw your entire pension for just 7.5% tax, but only if you take it all at once.
There are advantages for some in taking their pension as cash and reinvesting in a tax efficient Assurance Vie, but not for everyone. And there are differences between Assurance Vie providers and jurisdictions. So you need to sit down with your adviser to consider if this option is suitable for you.
Under Financial Conduct Authority rules, you can only transfer from defined benefit schemes worth over £30,000 with advice from a regulated specialist. You really should apply this to all your pension decisions. This is a highly complex area, and if you get it wrong you could at best pay more tax than necessary, at worst lose your pension savings.
The UK Pension Regulator is warning people not to get stung by pension scams. With the new freedom, scammers will try to lure people with promises of one-off investments, loans or upfront cash. They “try to flatter, tempt and pressure people into transferring pension funds into investments with guaranteed returns, most of which will be bogus”. Once the transfer has gone through, it is too late.
You need to be extremely careful about what you do with your pension fund, and take regulated professional advice for peace of mind. Remember, just because pension freedom exists, does not mean you have to use it. There is no requirement to go into drawdown, or buy an annuity or cash it in. Take the time you need to do your research and take specialist advice to make the best decision for you.
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.