Pension dilemma is cash-in tomorrow or today
Would you prefer to receive £300,000 today or £10,000 a year for the rest of your life? While there is no right answer, this is a similar dilemma faced by many Britons with ‘final salary’ pensions. These ‘gold-plated’ pensions are where employers pledge a minimum income throughout retirement, plus yearly cost-of-living increases.
But today many pension providers are offering non-retired members high pay-outs – ‘transfer values’ – in exchange for giving up future benefits.
Whether you plan to spend your retirement years in France or return to the UK, it is important not to rush into a decision and to take extreme care. Here are key questions to consider.
What is your pension worth?
Is it enough to provide for your retirement? A final salary pension worth £15,000 a year seems modest, but with transfer values at an all-time high of up to 40 times the income due, this could represent a pay-out of over £500,000. Properly managed, this could provide a retirement income that well exceeds the original annual payment.
Do you have other resources for retirement?
Is your transfer value high enough to outweigh the benefits of a guaranteed income for life? Or will other pensions, savings and investments provide for your future? If so, you may be inclined to forfeit a final salary pension for a one-off reward.
However, if your pension is a large part of your retirement wealth, the certainty of a regular lifetime income will have more value. As the UK state pension currently only pays up to around £8,000 a year, most people need something extra.
How long do you need it to last?
Final salary pensions provide income for as long as you live: with today’s increased life expectancy, that could be 30 years or more from retirement age. Only consider cashing-in your pension if you are confident you will not outlive your resources.
What will you pay in taxes?
Which is more tax-efficient – drawing UK pension income in France or reinvesting your cashed-in pension benefits?
For French residents, UK pension income (excluding government service pensions) is taxable solely in France at the normal income scale rates, ranging from 14% for income over €9,710 to 45% for €152,260 or more [these bands are set to rise slightly in 2018 - see page 33]. Your rate is determined according to the ‘parts’ system that divides your total household income by the number of members. That means high-value pensions could potentially push up the income tax rate for your entire household.
As well as French income tax, UK pensions can also attract annual social charges of 7.4%, unless you hold an EU S1 form or are not affiliated to the French health system.
However, if you cash-in your entire fund in one lump sum (with no possibility of taking more), you should qualify for a fixed income tax rate of just 7.5% (plus social charges, where applicable).
By cashing-in your pension, you could reinvest funds into French-compliant arrangements that might significantly reduce your tax liabilities.
In an assurance-vie, for example, only the growth element of funds is liable to income tax and social charges when you make withdrawals.
Alternatively, tax benefits can be unlocked by transferring UK pensions to a Qualifying Recognised Overseas Pension Scheme (Qrops). EU/EEA residents can transfer to an EU/EEA-based Qrops tax-free, otherwise a 25% UK tax penalty could apply. It is important here to get regulated, personalised advice on tax benefits and to fully understand the long-term implications.
Also, beware UK lifetime pension allowance (LTA) penalties. Where combined UK pension benefits (excluding the state pension) exceed £1million, anything accessed over this attracts 55% UK taxation (lump sums) or 25% (income and Qrops transfers) – even if French resident.
Usually, LTA charges are triggered for final salary pensions worth £50,000+ a year. But with today’s transfer values, you could potentially breach the limit by cashing-in a £30,000 pension – and risk losing over half the excess to taxation.
Note that if you have already started taking income from a final salary pension, it is unlikely you would be eligible to transfer your benefits.
How stable is your scheme?
Final salary pensions are costly for providers – and many are failing. Recently, thousands of ex-BHS employees lost their ‘guaranteed’ pension rights when the company collapsed. While the government’s Pension Protection Fund offers a safety net, it currently only compensates up to £34,655 a year at age 65. If your pension benefits are worth more than this and your scheme is vulnerable, consider transferring.
What will happen when you die?
Most final salary pensions will transfer half the value of the pension to your spouse on death, then go no further. Transferring your funds could unlock more flexibility in your estate planning, such as the option to pass on pension funds to other heirs, even across generations, and reduce your succession tax liability in France.
What is your appetite for risk?
Benefits in a final salary pension are protected; even if the value of funds goes down, the scheme provider is obliged to make the guaranteed payments. Once transferred, you gain more control over how you invest and access your funds, but they become vulnerable to unpredictable markets – even bank deposits can be eaten away as inflation outpaces returns. And without proper guidance, you risk losing everything to unregulated investments or pension scams.
Whether you should transfer a final salary pension depends on your unique set of circumstances and goals. If you have benefits worth over £30,000, the UK’s Financial Conduct Authority makes it compulsory to take regulated advice, even if you live in France or elsewhere. In any case, expert guidance is important for anyone considering their pension options.
Today’s generous transfer values and tax-efficient opportunities may be short-lived, so if you do decide to act, consider doing so sooner rather than later. If you cash-in your pension, however, you cannot reverse your decision so make sure you fully understand the long-term implications.
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
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.