Perhaps the most valuable piece of advice we can give is that your financial planning should be structured around your personal circumstances and objectives. You need to consider your life today and potential future requirements, and we cannot overstate the importance of reviewing and adjusting arrangements for life in France.
This enables you to take advantage of opportunities available for French residents that could, for example, significantly reduce your tax bill.
You could also enjoy more flexibility than UK-based arrangements can offer.
This includes reviewing your pension funds. With government revenues under pressure to effectively pay for expenditure during the pandemic, pensions are now an area coming under increasing scrutiny.
The UK press, for instance, has been speculating that the Chancellor Rishi Sunak may cut the lifetime allowance and amend the much-vaunted ‘triple lock’. With this in mind, perhaps now is the time to consider if you should bring your UK pensions with you if you are permanently living in France?
The answer will depend on your situation and goals for retirement. You need to carefully explore all your options and weigh the pros and cons of each before taking a decision.
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: 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, on the other hand, are company pensions that provide a regular income for the whole of retirement. While you cannot usually access benefits as cash, you can never run out of funds and lifetime payments usually pass to your spouse (where applicable) on death.
Remember: UK pension payments are usually paid in sterling. When you are living in France and spending 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 the income tax scale rates, ranging from 0% for income up to €10,084 to 45% over €158,122. 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 €3,858 per household.
Your tax rate is calculated 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.
If you take your whole pension fund as one lump sum, it may be possible to pay just 7.5% income tax with an uncapped 10% allowance, depending on your pension.
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 per couple). Charges do not apply if you hold Form S1 or are not registered for French healthcare. If you are ineligible for S1 and considering taking a pension lump sum, you could avoid social charges by taking private medical insurance instead of joining the French system.
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.
Usually, a Qrops provides greater investment diversification than UK pension schemes, with more freedom to vary income. 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, which can help minimise exchange rate risk for expatriates.
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 £1.073million, you incur a 25% tax penalty on anything transferred over the limit. The 2021 spring budget froze this allowance (instead of increasing it annually with inflation) until April 2026. Since then, The Telegraph reported that “well-placed sources” had revealed that the Chancellor is considering reducing it to £800,000 or £900,000 in his next budget.
Although your funds will be assessed for the LTA when you transfer into a Qrops, they would then never be subject to it again. Those who are currently near the LTA limit might 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 amount transferred. There are no approved Qrops in France, so you must select an eligible scheme in an EU/EEA country to avoid this penalty.
Now that the UK no longer has to follow EU freedom of movement of capital rules, the government has more scope to tax Britons living in the bloc. So far, it has not revealed plans to extend the 25% overseas transfer charge to capture EU-based Qrops, but the possibility cannot be ruled out.
Establishing your approach
Qrops receive the same tax treatment as UK pensions, so 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, personal advice to navigate the options.
While there is no easy answer for what to do with your pensions, today’s opportunities may not be available forever. Talk to a regulated adviser with cross-border expertise to ensure you are in the best financial position to make the most of your retirement in France.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our, Blevins Franks, 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.