Dos and don’ts with UK pensions in France
Today there is more freedom than ever for UK pensions. On the face of it, this is great news. Who does not want to have choice when it comes to accessing benefits that have been locked away for years? But this is not an easy climate for expatriates wanting to secure a prosperous retirement in France. Not only does Brexit bring much uncertainty, increased longevity means we potentially need to cover the cost of spending decades in retirement. There are cross-border tax considerations too. Understanding your options is the first step to establishing the best approach for you.
What can’t you do?
There are two key restrictions. First, you cannot transfer out of UK public sector schemes, such as civil service and NHS pensions.
Second, you cannot access your pension under the age of 55. If you are offered opportunities to do so, unless it is under exceptional circumstances such as critical health issues, be extremely cautious. Not only could you risk losing everything to scams, you could face 55% UK tax penalties on funds transferred.
What can you do?
If you have a ‘defined contribution’ (also known as ‘money purchase’) pension, you can take the entire fund as cash from the age of 55. This applies to personal or stakeholder pensions, many workplace pensions and Self-Invested Personal Pensions (SIPPs).
Other options include taking cash sums whenever you want or arranging a regular income through ‘flexible drawdown’. In these cases, the remaining funds would stay invested until your pot emptied. Alternatively, you could exchange your funds for an annuity that provides a regular income for life.
Britons in France have the additional option of transferring UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS). This can unlock more flexibility to pass pension benefits to chosen heirs (usually it is just your spouse), take income in euros or sterling, and protect funds from lifetime allowance penalties and future UK taxation.
Those with a ‘defined benefit’ or ‘final salary’ employer pension can expect to receive a fixed proportion of salary – usually increasing each year with inflation – for the whole of retirement.
While you cannot usually withdraw cash from these pensions, you can transfer to a defined contribution scheme or QROPS. Usually, the benefits of drawing a guaranteed income for life override the appeal of transferring. However, many of the sponsoring employers of final salary pensions are finding it harder to afford lifetime benefits amidst ultra-low interest rates and members’ increased life expectancy.
Today’s unusually high ‘transfer values’ for cashing-in a final salary pensions reflect the difficulties of funding the promises made. Traditionally, transfer values would represent 20x the annual salary due at retirement but, in some cases, current payments are reaching as high as 40x. In simple terms, this means that for a £30,000 final salary pension, a £600,000 pay-out would have increased to £1.2 million!
Remember: transferring means forfeiting the right to draw a guaranteed income – that never runs out – for as long as you live in retirement. Take regulated pension advice to ensure you understand the full implications and do what is right for you.
UK and French tax considerations
Generally, every time you withdraw cash from your pension, 25% will be tax-free in the UK. For British residents, the remaining 75% is subject to UK income tax rates as is any pension income.
The tax treatment is different for French residents. Only UK government service pensions remain taxable in the UK. Otherwise, lump sums and pension income taken by French residents attract French taxes, even if funds remain in Britain (exceptions can apply in extreme circumstances). French tax rates range from 14% for income over €9,807 to 45% above €153,783, with a 10% allowance on gross pension income (to €3,752).
For lump sums, it is possible to limit French tax to a fixed rate of 7.5% with an uncapped 10% allowance. You will only be eligible if you have not already started drawing benefits from your pension and you take the entire fund in one go.
Pension income and lump sums are also subject to annual social charges of 9.1% (previously 7.4%), unless you hold an EU Form S1 or do not have access to the French healthcare system. So if you are under the UK retirement age and wish to access your pension, it may be worth delaying joining the French healthcare system to prevent unnecessary social charges. Transferring UK pensions to a QROPS based in the EU or EEA (European Economic Area) is tax-free but a 25% UK charge applies on transfers to QROPS outside the region (unless you are resident in that jurisdiction). Some speculate that this may be extended post-Brexit, so there could be a limited time to transfer without tax penalties.
What should you do?
What is right for you will depend on your unique circumstances and goals. While many expatriates benefit from transferring UK pensions to a QROPS or reinvesting in a tax-efficient ‘assurance-vie’, this will not suit everyone. Discuss your options with a professional adviser who is regulated by the UK Financial Conduct Authority (FCA) to ensure the best outcome for you. They should also have cross-border experience to take the French and UK tax implications into account.
Behavioural economists sometimes refer to ‘choice overload’: when confronted with too many options, we often take no action at all for fear of getting it wrong.
While it is better to do nothing than do the wrong thing with your pension, with Brexit only a few months away, the window may be closing to take advantage of today’s opportunities. Take time now to review your options to secure long-term financial security in France.
This column is by Bill Blevins of Blevins Franks financial advice group (www.blevinsfranks.com). He has decades of experience advising expatriates in France and co-authored 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; individuals are advised to seek personalised advice.