There’s little interest in 0% saving
Last month I wrote about investing in property and discussed the need to keep some liquidity. Liquidity is all very well, but it is not currently very interesting – indeed, no member of society has been more neglected than savers.
We have not seen rates in Europe top 6% this millennium (October 2000 we saw 5.75%). Since then they have been in free fall – to 0.00%.
Thankfully, inflation is also around 0% and savings pay above this (generally around 0.75%), but this is searching hard for a silver lining.
This gives a problem with taxation. If returns are low, taxation is adding insult to injury as it can make the difference between being above or below inflation. First, we have income tax and then we have social charges and, as we know, there is no allowance for these and they are paid on first Euro, even if it is all the income you have. Happily, there are some options:
This is an instant access deposit account that only used to be available from select government owned banks, but has been available from all French banks for a while.
The plus is that it is exempt from both social charges and income tax. It does not even need to be declared on your French tax return. But people can have only one of these accounts and the maximum holding is €22,950 per person.
Livret de développement durable et solidaire
This is really a complement to the Livret A, as it does much the same; an instant access deposit account exempt from income tax and social charges. It has changed its name over time, first CODEVI, then LDD and now LDDS. The government says money from this account is loaned to energy-saving projects, hence its green claims of being ‘durable’.
The maximum that can be held is €12,000 per person, with a maximum of two per household.
To have a LDDS, you must be a tax resident of France, unlike the Livret A which can be held by non-residents.
Interest for both Livret A and LDDS is calculated on the 1st and 16th of each month so any withdrawals are best after the 15th or 30th to avoid losing up to 15 days’ interest.
The rate of interest for both is 0.75%. I will be impressed if this does not fall in August.
Livret d’épargne populaire
This is another tax and social charge free account, but access is limited, depending on the income of the saver and there is a limit of two per household. An LEP is available to those with incomes (as defined by your revenu fiscal de référence, given on your tax bill) of less than €19,275 of income for the first “part” and €5,147 for each supplementary part.
It is worth having, however, as the interest rate is 1.25%, though the most that may be held this way is €7,700 per account.
The combination of Livret A, LDDS and LEP allows a couple to save €85,300 in cash, which is probably as much cash as most may need to lay their hands on quickly – and all income tax and social charge free. To keep much more than this in cash makes little sense, as it will earn even lower rates and be subject to both income tax and social charges. So, what about the rest?
Plan d’épargne en actions
This PEA is not an investment as such, but a tax wrapper (an ‘enveloppe’ as the French would say). This is only available to fiscal residents of France and is an effective way to access shares and funds, such as unit trusts. Withdrawals are income tax-free after five years (social charges are still paid).
The maximum saving is €150,000 per person, with a limit of two per household. Children cannot have a PEA. It is possible to increase the allowance by adding a PEA-PME, whichis strictly invested in smaller companies, but this is the riskier end of the investment spectrum.
The level of risk associated with this is dictated by how it is set up and managed, so be sure that you fully understand what you are getting before starting one.
Contrat d’assurance vie
Like the PEA, an assurance vie is a tax wrapper and not an investment. This is easily the most popular method of saving in France, by a huge margin. Unlike the PEA, there are no ceilings.
There are also no set time frames, as with the PEA, which needs five years to offer tax advantages, although there is an extra allowance after eight years, but it is tax efficient from day one.
An assurance vie works by reducing what is deemed assessable, both to income tax and social charges, but the calculation is complicated. Although it is assessable to both taxes, the fact the taxable figure is so low means that the result is a greater tax saving than a PEA, which is assessed fully to social charges.
As with the PEA, the level of risk associated with this investment is dictated by how it is set up and managed, so be sure you understand what you are getting before starting one. Some guaranteed funds available in the French version of these wrappers pay around 2% net of charges.
Be very careful using international advisers who offer ‘offshore’ life assurance bonds purporting to be assurance vie, stating that they will work in France.
Most do not as they do not comply with the rules of fiscal representation, thus the tax benefits are not there. Moreover, they tend to be significantly more expensive than their French compliant counterparts. So, best get advice from a ‘French’ qualified and regulated adviser.
This column was written by Robert Kent of Kentingtons financial advisers.