The UK government took everyone by surprise in March by announcing a series of radical changes to pensions. The measures are the most significant pension reform since 1921, and give retirees much more freedom over their pension pot.
The UK government took everyone by surprise in March by announcing a series of radical changes to pensions. The measures are the most significant pension reform since 1921, and give retirees much more freedom over their pension pot.
For most people, their pension funds are a very significant part of their wealth. Retirement planning is an essential component of your new life here in France. Chancellor George Osborne explained that he wants “people to be trusted to make the right decisions about their future”, and retirees will appreciate having more control over their pension funds. However you need to be armed with all the facts, understand how all the options affect you, and review what you have to enable you to make the best overall decision for your personal situation. The reforms provide more options and opportunities, making specialist advice more important than ever before.
Some reforms have already been introduced for Defined Contribution Scheme members, while others will start next April.
With effect from 27th March 2014, the capped drawdown limit increased from 120% to 150% of an equivalent annuity. You can take a higher income from your pension fund, generally as at the date of your next annual review, but you also need to consider how this could affect your pension pot in later years.
Another key change was the reduction in the minimum income requirement for flexible drawdown, from £20,000 to £12,000.
Flexible drawdown allows you to take as much of your pension fund as cash as you wish, and this option is now available to more people.
It is important to consider the French tax implications before you make any decisions. Unusually for France, the taxation of the lump sum may not be as high as you may expect. Lump sums from UK pension funds are taxed at 7.5% in France, and where an entire pension fund is withdrawn under flexible drawdown, it is likely to be taxed in the same way.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. You will also escape the social charges on any pension lump sum or income if you are in possession of Form S1.
Occupational pension funds are not subject to wealth tax in France, although the capitalised value of an annuity is, and while there is an exemption on assets passing between spouses on death in France, the position is not otherwise clear. So you need to consider all of the tax implications of retaining the pension or extracting it in both France and the UK.
The size of a ‘small stranded pot’ that can be taken as a lump sum regardless of total pension wealth increased from £2,000 to £10,000 for those age 60 and over, and three funds can now be taken in this way. In addition, the total pension wealth people can have before they are no longer entitled to receive lump sums under trivial commutation rules increased from £18,000 to £30,000.
The government also launched a consultation on more pension reforms. It intends, following amended legislation, to remove all remaining restrictions on how retirees have access to their pension pots – you will have complete freedom to draw down as much or as little of your pot as you wish, any time you like.
The key change here is that the tax rate on cash taken out of defined contribution pension funds on retirement will be reduced from the current prohibitive 55% rate. If this goes ahead, the withdrawal (after the 25% tax free lump sum) would instead be taxed at the individual’s marginal rate of UK income tax. The good news is that the treaty gives taxing rights solely to France, so if taken as a lump sum while you are resident in France, the tax in France is only 7.5%, representing a very significant tax saving. Even if you do not hold Form S1 and have to pay social charges of 7.1% on the fund, the combined French tax and social charges will be less than one third of what you would pay in the UK. While the UK will almost always deduct the tax at source, this will be repayable to you.
These changes will not apply to Defined Benefit Scheme members, but a consultation has been launched regarding transferring out of public and private Defined Benefit Schemes into Defined Contributions Schemes.
These proposed conditions have wide implications for retirees. Again, you should consider the tax implications in France, as well as the fact that the cash would become exposed to French succession tax. Taking advice on your circumstances and investing tax-efficiently for France could allow you to avoid exposure to succession tax in France, or at least minimise the impact of this tax.
For larger funds, there is a need for sound financial planning and advice. The taxation, if structured correctly, could allow you to achieve a number of financial aims that may otherwise not have been possible. In some cases it may be beneficial to suffer tax on the funds to enable you to invest in something that suits you better, but this would have to be very carefully considered. You need expert advice to make sure you do what will work best for you in both the short and long-term.
Much can happen between now and April 2015. The proposed rules could change under consultation. A new government could well revise the rules – the General Election is currently scheduled for May but could happen before.
Specialist advice is therefore important for you to keep up-to-date on all the changes, as well as to establish the most suitable options for you. At Blevins Franks we have a dedicated Pensions Advisory Service and a dedicated Tax Advisory Service, with specialist technical knowledge of the fiscal issues affecting UK nationals living in France. Contact us for personalised advice on your situation.
29 April 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.
