We explore 7 key issues affecting UK pensions in France and how expatriates can take advantage of tax-efficient opportunities before Brexit.
So much has happened with pensions over recent years, it is easy to get confused. With more options than ever for how you can access your funds, it can be difficult to establish the best approach.
Here we outline seven pension issues that could affect expatriates in France, and explore what you can do to take advantage of today’s opportunities as Brexit approaches.
1. You could pay as little as 7.5% tax on a UK pension pot
British nationals with French residency can potentially withdraw their entire UK pension as a lump sum and pay just 7.5% in taxes with an uncapped 10% allowance.
This special rate is only available if you have not accessed your pension already and you take the whole amount at once; there must be no further possibility of taking out more. Also, pension contributions must have been deductible from your or your employer’s taxable income, so most company pensions will qualify (non-contributory schemes are unlikely to be eligible).
Otherwise, UK pensions are liable for French income tax rates as high as 45%, plus social charges of 9.1%. Only UK residents or French residents with UK government pensions attract UK taxes.
2. Taking private health insurance could reduce taxes
Many people do not realise that having access to the French healthcare system brings your pension into range for French social charges – adding 9.1% on top of any income tax payable.
You will not be liable for social charges, however, if you hold the EU form S1 (available once you have reached UK State Pension age). For anyone else, it may be sensible to delay registering for the French healthcare system until after you have accessed your pension to avoid unnecessary taxation.
3. ‘Transfer values’ have passed their peak
In ‘final salary’ or ‘defined benefit’ pensions, employers commit to paying an inflation-linked income throughout an employee’s retirement. Payments are usually generous and, crucially, guaranteed for life.
Over the last two years, the pay-outs offered for transferring final salary pensions have hit historic highs. While transfer values are usually calculated as a multiple of 20x the annual salary due at retirement, there have been recent cases of 40x. In an extreme example, this means the transfer value for a pension worth £30,000 per year may have doubled from £600,000 to £1.2 million!
Such high values reflect the desire for providers to reduce future pension liabilities. Funding these pensions has become more difficult as returns from the underlying investments – mostly UK bonds – have shrunk. But with UK interest rates predicted to rise in coming months – making pension provision more affordable – transfer values are starting to decrease. While this could mean a closing window of opportunity for today’s high transfer values, it is crucial to take time to fully understand all the implications when considering a transfer.
See more about transferring final salary pensions
4. Expatriates can access tax-efficient opportunities
Many expatriates in France find it beneficial to reinvest UK pension funds into a tax-efficient ‘assurance-vie’. Alternatively, transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS) can unlock tax benefits and offer similar estate planning advantages, such as the flexibility to include additional heirs and roll your wealth across generations.
However, tax benefits can vary greatly between providers and jurisdictions, so take professional advice to determine which approach, if any, is suitable for you and navigate the complex options.
Download our free guide to pensions for expatriates in Europe
5. A lower pension allowance could catch you out
If your combined UK pension benefits (excluding the State Pension) are close to £1.03 million, you risk breaching the UK lifetime pension allowance. Anything accessed over the limit as a lump sum is subject to 55% UK taxation, or 25% when taken as income or transferred, even if you are resident in France.
Calculating your lifetime allowance is not always straightforward and you could go over without realising it, for example through investment growth. If this affects you, consider HMRC ‘protection’ options or transferring to avoid losing a quarter or more of your excess funds to taxation.
Read more about the lifetime allowance
6. Regulated advice is essential
Transferring your pension – particularly from a final salary scheme – comes with risks and is never a one-size-fits-all solution. Whatever type of pensions you have, you need to make sure you put a strategy in place to see you through your retirement years while managing investment risk in line with your objectives. The worst case scenario of getting it wrong could mean losing everything to pension scams, or to unregulated investments that provide no compensation if things go wrong.
A quality adviser can help you weigh up the advantages, disadvantages and long-term implications of your available options. For final salary benefits worth over £30,000, the UK Financial Conduct Authority makes it compulsory to take regulated financial advice before transferring, but it is a good idea for anyone reviewing their pension arrangements.
See 6 tips for securing quality pensions advice in France
7. Brexit is likely to change things
Post-Brexit, the UK may no longer be obliged to meet EU rules on freedom of movement for capital; this could mean more flexibility to claim taxes from expatriates’ pensions.
The ‘overseas transfer charge’ introduced last year may indicate things to come. Today, French residents are able to transfer UK pension funds to a QROPS in the EU/EEA (European Economic Area) tax-free. But since March 2017, transfers outside the EU/EEA attract 25% UK taxation (unless you live in the same jurisdiction as the QROPS).
Many spectators expect the Treasury will widen the taxation net to include transfers within the EU, and even make it harder for expatriates to cash-in final salary pensions. As such, there may be limited time to transfer without tax penalties.
With so much uncertainty ahead, now is the time to review your pension arrangements. Take personalised, professional advice to establish what makes financial sense for your individual circumstances and objectives. A locally-based adviser can also keep you up-to-date with any developments that may affect you, so you can enjoy the retirement lifestyle you want in France.
Contact us to arrange a pensions review
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.