UK pension should be reviewed for life in France
I cannot overstate the importance of adjusting your financial planning to your life in France.
This enables you to take advantage of opportunities available for French residents that could significantly reduce your tax bill.
You could also enjoy more flexibility than UK-based arrangements can offer.
Does it, then, follow that you should bring your UK pensions with you if you are permanently living in France?
It would be easier if there was one right answer but that is not the case.
Everyone has their own set of requirements, plans and goals for retirement, so pension planning should be customised to you.
While you should take time over your pension decisions, today’s opportunities for Britons in France could change with Brexit or a change of UK government, so explore your options now.
Leaving your pension in the UK
One option is to do nothing and access your UK pensions from France. If you have a ‘defined contribution’ pension, you can access funds in various ways.
You could take cash in one lump sum or several withdrawals, receive a regular income until it runs out (drawdown) or purchase a lifetime income (annuity).
‘Defined benefit’ pensions are company pensions that provide a regular income for the whole of retirement. While you cannot usually access benefits as cash, you will never run out of funds and lifetime payments usually pass to your spouse (where applicable) on death.
If you have not started taking your defined benefit pension, you can transfer benefits to a defined contribution scheme for more flexible access. Take care, however, as transferring for a one-off sum is often less beneficial than receiving a guaranteed income for life.
Remember: 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.
French tax on UK pensions
For French residents, UK pensions are taxed in France at rates ranging from 0% for up to €9,964 to 45% for over €156,244. Only UK government service pensions remain taxable in the UK.
Instead of taxing the whole amount, the French tax authorities offer a 10% allowance on gross pension income, up to €3,812 per household.
They will also work out your tax rate according to the ‘parts’ system, dividing your total household income by the number of members.
For couples where one spouse receives a much higher income than the other, this results in a lower overall tax bill than if they were assessed individually.
If you take your whole pension fund as one lump sum, it is possible to pay just 7.5% tax with an uncapped 10% allowance (conditions apply).
Social charges of 9.1% are also payable when accessing pensions, or 7.4% where pension income is under €2,000 per month (€3,000 for a couple).
Charges do not apply if you hold Form S1 (available at UK state pension age) or if you are not registered for French healthcare.
This latter could include people under state retirement age and not working who therefore have private medical insurance instead of joining the French system. It could be a bonus when taking a lump sum.
Transferring pensions overseas
Residents in France can move UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) tax-free. Transferring to a QROPS can consolidate several UK pensions under one roof.
Funds would be sheltered from UK taxation on income and gains, and are immune to future changes to UK pension rules that may adversely affect you – an increasing possibility after Brexit.
Usually, a QROPS provides greater investment diversification than UK pension schemes, with more freedom to vary income. And, while most UK pensions are payable only to your spouse on death, a QROPS allows you to include other heirs.
Many QROPS also offer multi-currency flexibility. This can minimise exchange rate risk for British retirees in France in these uncertain times.
UK tax considerations
Although French residents can enjoy tax-free transfers to an EU/EEA-based QROPS, there are two key situations in which UK tax is payable.
First, if your combined UK pension benefits exceed the UK’s lifetime allowance (LTA) of £1.055 million, you incur a 25% tax penalty on anything transferred over the limit.
However, once in a QROPS, your funds would never be subject to LTA charges again.
Those who are currently at or near the LTA limit may benefit from transferring and paying any penalties now, before investment growth further increases tax liability.
The second taxable scenario is if you transfer to a QROPS based outside the EU/EEA. In this case, the UK applies a 25% ‘overseas tax charge’ on the whole amount transferred.
Note that there is no approved QROPS in France, so you just need to select an eligible scheme in an EU/EEA country to avoid this penalty.
Once the UK leaves the EU, the government gains more scope to tax expatriates living in the bloc. As such, it is possible that they could extend the 25% overseas transfer charge to capture EU-based QROPS post-Brexit. There may therefore be a limited time to make tax-free transfers.
Establishing your approach
As QROPS receive the same tax treatment as UK pensions, they may not be the most tax-efficient solution for French residents.
Although QROPS do offer wider appeal, you may find it more beneficial to reinvest UK pension funds into an alternative tax-efficient structure for France, such as an assurance vie, which can offer 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.
While there is no easy answer for what to do with your pensions, time may be running out for today’s opportunities. Talk to a UK-regulated adviser with cross-border expertise to ensure you are in the best financial position to make the most of your retirement in France.
This article is by Bill Blevins of Blevins Franks financial advice group who also writes for the Sunday Times on overseas finance. He is co-author of the Blevins Franks Guide to Living in France (www.blevinsfranks.com).
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.